Exchange Traded Fund Timing and Rotation
One interesting development that was made possible by the vast increase in the number of exchange traded funds available is the possibility to devise a profitable ETF rotation strategy for timing the stock market. Such a strategy can theoretically allow an investor to find the sectors of the market that are increasing in price.
Broad Index ETFs
The first ETFs that were introduced in the early 1990s track major market indexes such as the Dow Jones Industrial Index and the S&P 500. Other examples exist, such as QQQQ, which attempts to match the performance of the NASDAQ 100 Index. The NASDAQ 100 index is particularly volatile for a broad index because if includes a high portion of technology stocks.
Sector ETFs
Such ETFs as OIL (oil), GLD (gold) and SHY (short term bonds), allow a system to be developed that seeks to find which narrow market segment is likely to outperform in the near term and to move the assets in the system into such narrow segment until a better candidate is found. These ETFs provide some of the benefits of diversification that ETFs generally enjoy, while allowing some of the volatility that investing in narrow segments can enjoy also. These ETFs are specific enough to ensure that at least some of the market segments will move up no matter what phase of the economic cycle the economy is in. Thus, sector rotation strategies that can give great returns are now possible without investing in individual stocks.
Specific sectors can, of course, move dramatically within a short period of time - making selection of the proper exchange traded fund critical to any ETF rotation strategy.
ETFs that Cover Specific Countries or Regions
ETFs in recent years have been created for very specific country indexes -there are country specific ETFs for countries (or regions) as small as Hong Kong, South Africa and even Belgium. These country specific ETFs allow the investor to devise a rotation strategy that moves into the “hot” region and then out again when another region is poised to outperform. The last type of ETF that is useful for creating sector rotation strategies are the country or region specific ETFs.
Opportunities exist to profit from ETF trading - the nimble trader can get great returns and minimize risks.
Exchange Traded Funds exist that cover almost every part of the world’s markets - aggressive traders and investors have a whole world of opportunities (literally) to profit from.
