How To Pick A Sector ETF

March 15, 2017

Andrew Gogerty, vice president, investment strategies, Newfound Research, Chicago

At Newfound, on the quantitative side, we find there is a lot of evidence for systematically applied value-, momentum-, or trend-following-based approaches to sector investing.

For those sectors identified as exhibiting positive trends, we seek to exploit diversification by equally weighting their exposure in the portfolio.

On the behavioral side, instead of focusing on upside alpha opportunities, Newfound’s sector-based portfolios instead focus on trying to avoid significant downside losses. There, we employ a proprietary trend-following model to remove sectors from the portfolio that are exhibiting significant risk of loss.

In other words, our focus is not on those sectors we expect to relatively outperform, but on those sectors we believe could lead to the absolute loss of capital.

Today our models indicate positive trends across all of the primary U.S. sectors. Under the hood, however, we can see that our models are least confident about the trends seen in the energy, staples and utilities sectors. If we continue to see further sustained negative price movement in those sectors, that would eventually lead to the removal of those sectors from our portfolios.


Michael Venuto, co-founder and chief investment officer, Toroso Investments, New York

In our Sector Opportunity Portfolio, we look at job creation per sector and industry on a three-, six- and 12-month basis. Last September, in the report from the Department of Labor, we saw an increase in financial jobs, specifically in the banking industry. In October, we established a position in the SPDR S&P Bank ETF (KBE), which, pre-election, was quite scary.

We follow the fundamentals of job growth, and banking—within financials—continues to grow. Other sectors we currently like are technology, industrials, health care services and materials.

Contact Cinthia Murphy at [email protected]


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