How To Pick A Sector ETF

March 15, 2017

Sector investing is popular, and we’ve been hearing a lot about sector rotation opportunities in the face of changing correlations since President Trump’s victory last year. But as an investor, how do you know when it’s time to get in or out of a sector? How do you pick the best sector to be in?

Unfortunately, there’s no single recipe that works here. Different investors look at different metrics and go about it in different ways in their hunt for the best sector for maximum return and minimum risk—price momentum, historical relative performance, job market trends, changes in volatility, volume, GDP data, etc.

We asked four ETF strategists for a little help, with a three-part question that asked the following:

  • What's your top sector pick right now?
  • What signals do you look for to decide when it's time to jump in or out of a sector?
  • What ETFs do you recommend to access your top sector pick?

Here’s what they had to say:

Rob Stein, CEO, Astor Investment Management, Chicago

Our top sector now is financials. We are getting our exposure using the Financial Select Sector SPDR Fund (XLF).

At Astor, we are fundamentally and economically driven. For sector allocation, we look to see how much a sector is contributing to overall economic growth. We compare that to historical trends of a sector’s contribution, and we then overlay a momentum indicator for confirmation.

We have a proprietary indicator of the economy, the Astor Economic Index, which gives us a “live read” or “now-cast” of the economy. We adjust equity exposure based on the index. Keep in mind that a neutral reading correlates with a positive expected return for stocks.

We then drill down into sectors to see which ones are contributing the most to economic activity, analyzing things like GDP and employment trends. Lastly, we confirm this with our proprietary trend indicator and risk indicator.


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