Strategy 3: Geographic
Looking to markets outside your home country can be a lucrative strategy, as there are often global markets that may be seeing comparatively stronger growth. Before ETFs, investing in these global markets was trickier, but with ETFs you can simply monitor which country ETFs are performing the best, and buy those funds. As momentum begins to wane, exit the trade and look for another country that is performing better.
During 2012, the MSCI Singapore Index Fund (EWS) performed well, gaining close to 26% relative to the SPDR S&P 500 (SPY)––a gain of roughly 13% on a price performance basis. The MSCI Mexico Index Fund (EWW) performed even better, racking up a price gain of 31%.
Investors can also invest in a category, such as “emerging markets.” These markets are in their growth phase, and while the ups and downs can be volatile, strong trends can bring big rewards. To invest in a basket of emerging countries, look to the popular FTSE Emerging Markets ETF (VWO) or the MSCI Emerging Markets Index Fund (EEM).
The Bottom Line
Whether you are looking to capitalize on economic cycles, seasonal tendencies or geographic trends, ETFs provide a simple and direct way to accomplish this through a rotation strategy. As with any strategy there are risks, and it is important to gather information on the markets and ETFs you are investing in before making your purchase.
Sector rotation strategies generally position the investor in the strongest segments of the global economy, but trends change. When the sector you are in starts to turn, it is time to exit the position and look for another segment that is performing better. This may incur commissions and some active management of the portfolio, but if done correctly, the returns should more than compensate.
Cory Mitchell writes for ETFdb, which offers a comprehensive and original ETF database and analytical consulting services for advisors and investors, as well as a free newsletter. Learn more about their services by visiting ETFdb.com. Disclosure: the author had no positions in the securities named in this article at the time of writing.