52-Week Range

What Does 52-Week Range Mean?

The lowest and highest prices at which a stock has traded in the previous 52 weeks. The 52-week range is provided in a stock's quote summary along with information such as today's change and year-to-date change. Companies that have been trading for less than a year will still show a 52-week range even though there isn't data for the full range.

Investopedia explains 52-Week Range Technical analysts compare a stock's current trading price to its 52-week range to get a broad sense of how the stock is doing, as well as how much the stock's price has fluctuated. This information may indicate the potential future range of the stock and how volatile the shares are.

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Explaining The World Through Macroeconomic Analysis

When the price of a?product you want to buy?goes up, it affects you. But why does the price go up? Is the demand greater than the supply? Did the cost go up because of the raw materials that make the CD? Or, was it a war in an unknown country that affected the price? In order to answer these questions, we need to turn to macroeconomics.

TUTORIAL: Economics

What Is It?
Macroeconomics is the study of the behavior of the economy as a whole. This is different from microeconomics, which concentrates more on individuals and how they make economic decisions. Needless to say, macroeconomy is very complicated and there are many factors that influence it. These factors are analyzed with various economic indicators?that tell us about the overall health of the economy.

Macroeconomists try to forecast economic conditions to help consumers, firms and governments make better decisions.
Consumers want to know how easy it will be to find work, how much it will cost to buy goods and services in the market, or how much it may cost to borrow money. Businesses use macroeconomic analysis to determine?whether expanding production will be welcomed by the market. Will consumers have enough money to buy the products, or will the products sit on shelves and collect dust? Governments turn to the macroeconomy when budgeting spending, creating taxes, deciding on interest rates and making policy decisions.

Macroeconomic analysis broadly focuses on three things:?national output (measured by gross domestic product (GDP)), unemployment and inflation. (For background reading, see The Importance Of Inflation And GDP.)

National Output: GDP
Output, the most important concept of macroeconomics, refers to the total amount of goods and services?a country produces, commonly known as the?gross domestic product. The figure is like a snapshot of the economy at a certain point in time.

When referring to GDP, macroeconomists tend to use real GDP, which takes inflation into account, as opposed to nominal GDP, which reflects only changes in prices.?The nominal GDP figure will be higher if inflation goes up from year to year, so it?is not necessarily indicative of higher output levels,?only?of?higher prices.

The one drawback of the GDP is that because the information has to be collected after a specified time period has finished, a figure for the GDP today would have to be an estimate. GDP is nonetheless like a stepping stone into macroeconomic analysis. Once a series of figures is collected over a period of time, they can be compared, and economists and investors?can begin to decipher the business cycles, which are made up of the alternating periods between economic recessions (slumps) and expansions (booms) that have occurred over time. (For more, see High GDP Means Economic Prosperity, Or Does It?)

From there we can begin to look at the reasons why the cycles took place, which could be government policy, consumer behavior or international phenomena, among other things. Of course, these figures can be compared across economies as well. Hence, we can determine which foreign countries are economically strong or weak.

Based on what they learn from the past, analysts can then begin to forecast the future state of the economy. It is important to remember that what determines human behavior and ultimately the economy can never be forecasted completely.

Unemployment
The?unemployment rate tells macroeconomists how many people from the available pool of labor (the labor force) are unable to find work.?(For more about employment, see Surveying The Employment Report.)

Macroeconomists have come to agree that when the economy has witnessed growth from period to period, which is indicated in the GDP growth rate, unemployment levels tend to be low. This is because with rising (real) GDP levels, we know that output is higher, and, hence, more laborers are needed to keep up with the greater levels of production.

Inflation
The third main factor that macroeconomists look at is the inflation rate, or the rate at which prices rise. Inflation is primarily measured in two ways: through the?Consumer Price Index (CPI) and the GDP deflator. The CPI gives the current price of a selected basket of goods and services that is updated periodically. The GDP deflator is the ratio of nominal GDP to real GDP. (For more on this, see?The Consumer Price Index: A Friend To Investors and The Consumer Price Index Controversy.)

If nominal GDP is higher than real GDP, we can assume that the prices of goods and services has been rising. Both the CPI and GDP deflator tend to move in the same direction and differ by less than 1%. (If you'd like to learn more about inflation, check out our Tutorial: All About Inflation.)

Demand and Disposable Income
What ultimately determines output is demand. Demand comes from consumers (for investment or savings - residential and business related), from the government (spending on goods and services of federal employees) and from imports and exports.

Demand alone, however, will not determine how much is produced. What consumers demand is not necessarily what they can afford to buy, so in order to determine demand, a consumer's disposable income must also be measured. This is the amount of money after taxes left for spending and/or investment.

In order to calculate disposable income, a worker's wages must be quantified as well. Salary is a function of two main components: the minimum salary for which employees will work and the amount employers are willing to pay in order to keep the worker in employment. Given that the demand and supply go hand in hand, the salary level will suffer in times of high unemployment, and it will prosper when unemployment levels are low.

Demand inherently will determine supply (production levels) and an equilibrium will be reached; however, in order to feed demand and supply, money is needed. The central bank (the Federal Reserve in the U.S.) prints all money that is in circulation in the economy. The sum of all individual demand determines how much money is needed in the economy. To determine this, economists look at the nominal GDP, which measures the aggregate level of transactions, to determine a suitable level of money supply.

Greasing the Engine of the Economy - What the Government Can Do

Monetary Policy
A simple example of?monetary policy is the central bank's open-market operations. (For more detail, see our Tutorial: The Federal Reserve.) When there is a need to increase cash in the economy, the central bank will buy government bonds (monetary expansion). These securities allow the central bank to inject the economy with an immediate supply of cash. In turn, interest rates, the cost to borrow money,?will be reduced because the demand for the bonds will increase their price and push the interest rate down.?In theory, more people and businesses will then buy and invest. Demand for goods and services will rise and, as a result, output will increase. In order to cope with increased levels of production, unemployment levels should fall and wages should rise.

On the other hand, when the central bank needs to absorb extra money in the economy, and push inflation levels down, it will sell its T-bills. This will result in higher interest rates (less borrowing, less spending and investment) and less demand, which will ultimately push down price level (inflation) but will also result in less real output.

Fiscal Policy
The government can also increase taxes or lower government spending in order to conduct a?fiscal contraction. What this will do is lower real output because less government spending means less disposable income for consumers. And, because more of consumers' wages will go to taxes, demand as well as output will decrease.

A fiscal expansion by the government would mean that taxes are decreased or government spending is increased.?Ether way, the result?will be growth in real output because the government will stir demand with increased spending. In the meantime, a consumer with more disposable income will be willing to buy more.

A government will tend to use a combination of both monetary and fiscal options?when setting policies that deal with the macroeconomy.

The Bottom Line
The performance of the economy is important to all of us. We analyze the macroeconomy by primarily looking at national output, unemployment and inflation. Although it is consumers who ultimately determine the direction of the economy, governments also influence it through fiscal and monetary policy.

by Reem Heakal (Contact Author | Biography)

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Traders: Which Markets Should You Trade?

Filed Under: Active Trading, Alternative Investments, Commodities, Currencies, Day Trading, Derivatives, ETFs, ETNs, Forex, Futures, International Markets, Investment, Options, Portfolio Management

As technology increases and trading innovation continues, the world is seeing an expansion in the types of trading instruments that can be used.?Even seemingly separate markets are attempting to steal each other's market share.?For example, a person no longer needs to buy gold physically or even from a futures contract, they can simply buy an exchange traded fund (ETF) to participate in the movement of gold prices.?Considering that similar scenarios are possible with currencies, commodities, stocks and other investments, traders can fine tune how they trade and tailor it more to their individual circumstances.

TUTORIAL: Trading Systems?

Markets, Markets, Markets
Depending on education and experience, a person may not even be totally aware of the investments or trading vehicles that are accessible with a click of the mouse.?Even while avoiding abstract and illiquid markets, traders can find trades within many different markets:

Stock Market:?This well known market simply involves buying/shorting shares of a company.

ETF Market: Funds representing all sorts of sectors, industries, currencies and commodities.?Trading similar to stocks, these funds can be bought and sold rapidly or held long term.?

Forex Market: The largest market in the world. The forex market facilitates the exchange of one currency for another currency.?Currencies are always traded in pairs, with many potential combinations available, but only some of which are very liquid.

Options Market:?A market which allows participants to undertake positions in the derivative of an asset.?Therefore, the option is not ownership of an underlying asset (though rights and obligations exist), but the option price (along with other inputs) fluctuates with the value (or lack of) that the underlying asset is providing.

Contract for Difference (CFD):?A hybrid of the stock, forex and options market that allows participants to place trades in a derivative product based on an underlying asset. Generally the CFD does not have an expiry date, premium or commission (see broker's terms and conditions), but does require the participant generally pay a larger bid/ask spread than what would be seen in the actual physical market for a product. (To learn more about CFDs, see Instead of Stocks, Trade A CFD.)

While there are other markets, these markets are all now easily accessible from home to just about anyone with an internet connection.?Each market offers different advantages and disadvantages.?Because of this many traders may decide to trade only one market because they feel it suits one aspect of their life or they lack knowledge of available markets.?This could mean that traders are not taking advantage of the correct market given their trading style.

Which Markets to Trade?
The style of trading employed, financial resources, location and what time of day a person trades (or wants to trade), can all play a role in which markets will be best suited to the individual.?Since some of these markets may not be familiar we will look at two common trader groups and how they could implement the use of other markets to improve their trading.?It is important to be aware of such alternatives, as they may provide for some fine tuning which can result in better results over the long run.

Alternative?Markets For Day Traders
Since 2000 there has been a steady increase in the amount of turnover in the foreign exchange markets.?This has meant an increase in the number of day traders opening accounts with forex and CFD brokers, which have also increased in number.?The main lure is that minimal investment is required.?Accounts can often be opened for as little as $100-$1000 and will allow individuals to day trade global currencies, indexes and commodities.?With the forex market the trader is actually exchanging one currency for another, possibly in an account denominated in yet another currency.?It seems nice – low barriers to entry, generally no commission (but a spread is paid), high leverage (high risk/high reward) and free trading tools such as charts and research.?But there are alternatives if one wants to trade forex or CFDs, which can encompass just about every other market. (Check out Day Trading Strategies for beginners to learn about some common strategies.)

Exchange traded funds now allow traders to partake in the currency moves by making trades on the stock exchange.?? While opening a day trading stock/ETF account will require more capital, there are advantages in that ETFs themselves can be leveraged or unleveraged.?This means someone who wants to take on additional risk/reward for each incremental price movement can do so by buying a "3X bull" ETF for example.?Also, with an ETF, a trader is not required to pay the spread. Instead, they can sit on the bid or offer providing liquidity and thus collecting ECN rebates (offsetting commissions, or providing additional profit).?This is very advantageous in currency pairs with limited movement, or when the trader wishes to implement a scalping strategy.

ETFs also allow a trader to partake in other markets such as the movement of oil gold, silver or stock indexes; traders can move out of the CFD market and begin trading ETFs as well, providing them with a greater range of products.?Depending on trading style, using ETFs, CFDs and the forex market may be wise.?Different instruments can be used to hedge or take advantage of disconnects in price such as a currency pair moving without the corresponding ETF moving (or vice versa).

Alternative Markets For Long Term Investors?
Commodities often attract long term investors, yet they may be unfamiliar with futures markets and so they have not participated directly in the movements of commodities such as gold, silver or platinum.?Also, it is unlikely they have different currency exposure.?And while they may have considered options trading, the time-framed nature of the instrument does not appeal to their trading plan.

Here is another opportunity where understanding different markets can open new doors even for conservative investors who make few trades.?After learning about the different markets, the forex market can be used to gain currency exposure.?ETFs can also be used to gain currency exposure, as well as participate in the price movements of gold, oil, silver or even other global economies.?CFDs can be used by long term traders since the bid/ask spread is minimal over the time frame and they provide some of the benefits of options, but without the expiry date.?For instance, large blue chip stocks are often available via CFDs.?The stock is not actually owned, which allows for the participation in price movements with less capital in use (because high leverage can be used if desired), but the CFD does not provide voting rights or any of the perks associated with ownership of a piece of that company.?When trading any instrument it is important to be aware of taxes and how the instruments fit into overall objectives, including retirement. ??Each instrument may be treated slightly different; therefore it is wise to seek out the advice of a professional.

Bottom Line
It is important to be aware that alternatives are out there.?This does not mean every alternative will be good for every individual, but using a combination of markets or fine tuning how we interact with those markets can have an impact on results.?For some individuals this may mean they need to switch markets as their success is unlikely if they continue to do what they are doing.?On the other hand, incorporating other markets may provide benefits like small changes in costs, capital outlays and risks that can have large effects over the long run.?Becoming familiar with all the markets available will allow for more opportunities and potentially increased profits or reduced costs. (For related reading, take a look at 5 Equity Derivatives And How They Work.)

by Cory Mitchell (Contact Author | Biography)

Cory Mitchell is an independent trader specializing in short- to medium-term technical strategies. He is the founder of www.vantagepointtrading.com, a website dedicated to free trader education and discussion. After graduating with a business degree, Mitchell has spent the last five years trading multiple markets and educating traders. He has been widely published and is a member of the Canadian Society of Technical Analysts and the Market Technicians Association.

Filed Under: Active Trading, Alternative Investments, Commodities, Currencies, Day Trading, Derivatives, ETFs, ETNs, Forex, Futures, International Markets, Investment, Options, Portfolio Management

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What You Need To Know About Financial Analysts

Have you ever wished that you had the time to research a security that you owned or wanted to buy? Conducting in-depth research on a company takes a substantial amount of time and there is a mountain?of information that must be sifted through in order to do it well. For busy investors, this is where analysts come in. These financial professionals provide investors with the basic information on particular securities, giving them the tools they need to gauge the attractiveness of certain investments.

TUTORIAL: Financial Ratios

The increased popularity of analyst ratings over many years has expanded their influence over the price of securities. The slightest change in an analyst's rating for a particular stock can make the stock take off - or send it into a tailspin. Some people believe that analysts have too much power; others point to the conflicts of interest today's analysts face. Whatever the reason, it's important that all investors understand the different categories of analysts and what drives each analyst's recommendations.

Types of Analysts?
Buy-Side
Buy-side analysts work for large institutional investment firms such as mutual funds, hedge funds or insurance companies. They offer recommendations on securities found in the accounts of their employers. These analysts focus their research on specific sectors or securities that are of interest to the investment firm. These reports are mainly for internal use.

Sell-Side
Generally employed by broker-dealers and investment banks, sell-side analysts are a part of the retail investment division. Their recommendations and ratings are created to sell an investment and are typically offered free of charge to the clients of the brokerage firm. The reports issued by sell-side analysts are generally more detailed and focused than those of the buy-side analysts. (If you're looking for a career in this field, find out more in Becoming A Financial Analystand Sizing Up A Career As A Ratings Analyst.)

Independent
These analysts are not employed or associated with any specific brokerage firms or fund companies. Independent analysts aim to provide unbiased and objective ratings. Independent analysts receive compensation either from the companies they research, which is called fee-based research, or by selling subscription-based reports. (For more on this topic, see Fee-Based Research: The Good, The Bad And The Ugly.)

Conflicts of Interest
Investment Banking Relations
This is one of the most significant areas of conflict of interest for analysts. Investment banks are financial institutions that perform services such as underwriting (issuing stocks and bonds); they also act as an intermediary between the issuers of securities and the investing public. In essence, when a company decides to go public, it will obtain the services of an investment bank to help facilitate the process and sell the new securities to investors. Consequently, an analyst may face a conflict of interest for the following reasons:

If the analyst of a particular security works for the same investment bank that is underwriting the new issue, he/she may be inclined to give a positive recommendation to ensure that the offering is successful. This is not unlike the way a car dealership might operate: all cars have advantages and disadvantages, but most car dealers will tell you that their brand makes the finest cars.
Investment banks are like most other businesses. They are always trying to increase profits, and they can attract more business by issuing favorable reports about their clientele. Favorable reports keep existing client companies happy and facilitate repeat business. This can give prospective companies the impression that they will benefit from the same favorable reports should they pay for the services of a particular investment bank. Brokerage Commissions
Brokers typically generate revenues from the commissions associated with buy and sell transactions made by account holders. Although these brokerages don't charge for the research reports that they provide, they are still profit-oriented organizations. The intent of their research is to create customer interest in a particular stock, which ultimately leads to more transactions.

Analyst Compensation
When analyst compensation is associated with the performance that their ratings generate, another conflict of interest may arise. Compensation that is directly based on the number of new investment banking deals generated by the analyst's reports, or upon the profitability of the investment bank in general can put subtle (and perhaps, unintentional) pressure on the analyst to issue positive reports and recommendations.

Ownership
Through direct ownership or through a pooled stock purchase plan, analysts and employees of the investment bank may own the very stocks that they are recommending. Analysts may, therefore, be reluctant to issue poor reports or recommendations on a security that they own because it could affect their personal profits.

Despite the number of conflicts of interest that can affect an analyst's recommendations, we should note that the U.S. government?and the?Securities and Exchange Commission (SEC) have established regulations in order?to clamp down on the various conflicts facing analysts. (To learn more about these SEC regulations, see Reg AC: What Does It Mean To Investors?)

How Do I Determine Analyst Objectivity?
In most cases, you will find an analyst's conflicts of interest (if any) identified in the disclaimer found near the end of any analyst report. The disclaimer discloses the type of relationship that the research firm has with the company being analyzed and how compensation is paid to the analyst or research firm (should they be compensated at all). Be warned, however, that just reading the disclaimer won't make you able to fully discern the relationship between the analyst and the company on which it is reporting.?

Analysts?Aren't All Bad
The historical impression of analysts as the "whipping boys" of the financial industry is another one of those instances where a few unscrupulous people have ruined the reputations of the rest. Regardless of what recommendation an analyst provides on a stock, research reports are still loaded with company information such as highlights from the last year's results, ratio analysis, past growth trends and other pertinent information that would take an individual many, many?days to compile.

No matter what opinion you may have about analysts and their industry, we hope this article has left you with a rough idea of what analysts do. Next time you scour through a research report, you'll know a little more about how to judge the integrity of the research, as well as that of the analyst who conducted it.

If you are interested in learning more about this subject, check out the article The Changing Role Of Equity Research In Today's Market.

by Investopedia Staff (Contact Author | Biography)

Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.

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Sector-Based ETFs Spread Out Risk

Until the advent of the?sector-based?exchange-traded funds (ETFs), implementing a sector rotation strategy could only be well-executed by large institutional investors. Now with ETFs, individual investors can easily and cheaply?implement this strategy. (Check out our tutorial on Exchange-Traded Funds (ETFs)?to learn the basics to these funds.)

TUTORIAL: Risk And Diversification

What is a Sector Rotation Strategy?
One way of defining a stock’s risk is by breaking it down to: stock-specific risk, market risk and industry risk. Just as most stocks tend to move based on the underlying factors that drive the overall market, stocks in a similar industry will tend to move based on underlying factors that drive that industry.?For example, when oil prices are rising, most stocks in oil-producing companies will follow suit. Similarly, when the subprime mortgage market collapsed, it impacted most financial stocks, as financial companies were owners or originators of those loans.?(To learn more about investing in ETFs when there's an unstable market, read 4 ETF Strategies For A Down Market.)

A sector rotation approach is similar to tactical asset allocation, where?investors will allocate their funds to those asset classes which they believe will outperform in the relative short term. In sector rotation, rather than individual asset classes, the investors will allocate funds to different sectors depending on their short-term views. The investor will?overweight those sectors that he or she believes will?outperform and?underweight those he or she believes will underperform.

This?sector rotation (or sector allocation strategy) is a top-down strategy. In developing a strategy, an investor identifies key factors within each sector to help predict the future relative performance of the sector, and then the investor will overweight or underweight the sectors based on the current status of those factors. These factors could include: measures of economic activity monetary policy interest rates commodity prices other industry-specific factors. In the analysis, a long history of data over a number of different economic and market cycles is usually required to identify the key factors and leading indicators that can predict relative performance. (To learn more about market cycles, read Understanding Market Cycles - The Key To Market Timing.)

Selecting the Right Family of ETFs
The introduction of sector ETFs has allowed the individual investor to easily implement sector rotation strategies that were not practical before. There are three considerations when selecting the right family of sector ETFs. The first is that the ETF should contain the full?spectrum of sectors and stocks that make up an index. Secondly, the index should be broadly based - representative of the overall economy. Lastly, there should be sufficient history on the underlying sectors to be able to carry out the long-term due diligence required to uncover the key factors.

Market-Weighted Sector ETFs
Market-weighted sector ETFs?are based on the traditional market capitalization indexes and their underlying sectors. The two largest families of sector ETFs are the Barclays iShares Dow Jones sector ETFs and the State Street Global Advisors sector ETFs.?Each covers the full expanse of stocks and sectors that are constituents in their respective indexes.

Barclays iShares Dow Jones sector ETFs use the Dow Jones U.S. index as the underlying index. This index is a market capitalization index designed to represent 95% of the U.S. equity market. The iShares uses the?Industrial Classification Benchmark?(ICB) system to determine the composition of each sector and sub-sector. ETFs are available for each of the 10 main sector categories.

State Street Select Sector SPDRs use the S&P 500 as the underlying index.?It is a market capitalization index representing about 75% of the U.S. equity market.?The Select Sector ETFs use the Global Industry Classification Standard?(GICS)?to determine the composition of each sector. Although there are 10 sectors, there are only?nine ETFs, as?the information technology and telecommunications sectors are combined to create one "technology" ETF.

Both the GICS and ICB are biased toward large-cap?stocks. Since economic analysis plays a big part in the sector rotation strategy, it is important that the underlying sectors are representative of the broad economy. Using either of the two will provide excellent exposure to the overall U.S. economy and the sectors in it. The iShares ETFs are more comprehensive, but SPDRs have a longer track record. (Learn more about these types of ETFs in Market Cap, Equal Weight And Fundamental Indexing.)

Equal-Weighted Sector ETFs
Equal weight?means that all stocks have a similar weighting in the index, regardless of the size of the company.?In a market-weighted index, the?large-cap stocks have a greater impact than the?small-cap stocks.?Therefore, an equal-weighted index will tend to outperform a market-weighted index when small caps are out-performing large caps.

The Rydex S&P 500 Equal Weight sector ETFs are based on the S&P 500 index and the GICS standard. An equal-weighted index is more biased toward small stocks and might not be representative of the overall economy. It is important that the sectors not only represent the entire economy but are also in similar proportion to the index.?For example, if the energy sector is 15% of the economy, a 15% weight in the index would demonstrate that it is close to the same representation. An equal-weighted index would overweight small-cap stocks and underweight large-cap stocks. Since large-cap stocks are more representative of the economy, equal-weighted ETFs might not be the best choice when implementing a sector rotation strategy.

Fundamentally Weighted?Sector ETFs
A fundamentally weighted index is a relatively new addition to the ETF landscape. Rather than being based on market capitalization or equal weight, the weighting of each stock in the index will be based on the underlying fundamentals. PowerShares has created a series of sector ETFs based on a fundamentally weighted sector index, the FSTE RAFI US 1000 Index. The factors that determine the fundamental value are: sales, cash flow, book value and dividend. Companies that are deemed the largest by those underlying factors will have the largest weights in the index.

There are?nine PowerShares FTSE RAFI sector ETFs. The ICB is used to determine the composition of each sector. Information technology and telecommunications have been combined into one sector.

Market weight indexes tend to give greater weightings to overvalued stocks (stocks that have appreciated to high market caps) compared to the underlying fundamentals. This might overstate the importance of those stocks, and their corresponding sector, within the overall economy. Consequently, a fundamentally weighted index might be more closely aligned to the overall economy since the weights of the individual companies are based on size of the company, not just the market cap. Unfortunately, this index does not have the extensive history necessary to determine the underlying factors that drive sector performance. (To learn more about these types of indexes, read S&P 500 ETFs: Market Weight Vs. Equal Weight.)

Sector Rotation Using Only Sector ETF
In developing and implementing a system for?sector ETF investment,?it is important to select an appropriate benchmark index. Once the index is selected, an investor must understand how the index and the underlying sectors are constructed, as well as how the constituent stocks are chosen. Using the S&P 500 Index would be a good choice, not only because it has broad large-cap representation of the market, but also because it has a long history.

To demonstrate a simple strategy, let’s examine the State Street Select Sector SPDRs ETF, which uses the S&P 500 as the base index.?We'll assume a $100,000 investment in the strategy. In the table below, we show the sectors, the symbol of the appropriate ETF, the current sector weight, as well as the amount invested in each ETF to implement the strategy.?

Example 1: Sector Rotation Strategy April 30, 2008
The strategy is to overweight energy, healthcare, industrials and the materials sectors. Financials, technology and utilities will underweight the index, and consumer discretionary and consumer staples will be market weight. With $100,000 to invest, a portfolio containing eight sector ETFs would be easy to implement. It would, however, not be able to exactly match the percentages as it might if sector mutual funds were used.?For example, if the energy sector ETF, XLE, trades at $87.70, then it would take 193.8 shares. Rounding would mean buying 190 shares (or $16,663) representing 16.67% of the total portfolio.(Find out more in?Mutual Fund Or ETF: Which Is Right For You?.)

Sector Rotation Using Core and Satellite Positions
Using a core and satellite approach could implement the same strategy as above.?In the example below, the portfolio has the same sector weights as in the first example. In this case, $50,000 is invested in the S&P 500 Index using the SPY ETF to represent the core, and then additional sector ETFs are purchased to reach the target amount. For example, let's say you want to achieve a weight of 17%?invested in the S&P 500 energy sector. If?the SPY ETF has a $7,000 exposure in the energy sector (14% * $50,000), then $10,000 of XLE will have to be purchased to make up the balance. For utilities, since we did not want any more exposure, $1,800 of the XLU would be sold short.

Example 2: Sector Rotation Strategy Using Core/Satellite
In this example, there is no major advantage over using just the sector ETFs. However, there is a small cost advantage as the SPY ETF has an expense ratio of only 0.09% versus 0.27% for the sector ETFs. In the first case the annual management fees would be about $270, and in the second case it would be about $180.

Taking a specific sector bet, the core and satellite approach will be simpler and more cost effective.?As an example, assume that you want your portfolio to overweight the energy sector by 6%, and have the rest in the balance of S&P500. Using $100,000, a total of $20,000 invested should be invested in the energy sector.

Investing $93,000?in the SPY ETF and $7,000 in XLE will result in a 20% weight?in energy ($93,000*0.14 = $13,020 coming from the SPY). The net result is a portfolio that is 20% energy sector and all the other sectors are proportionally underweight. This portfolio will have only two securities versus nine if the sector ETFs were used and it would be cheaper and simpler to implement.

Conclusion
The advent of the sector ETF allows individuals to easily implement sector rotation or sector allocation strategies. It is important to select the right family of ETFs with broad representation and a good history to implement the strategy. Although one can build a portfolio by just using the sector ETFs, a core and satellite approach can accomplish the same result and in some cases it is a simpler and cheaper solution.

by Ken Hawkins (Contact Author | Biography)

Ken Hawkins is the founder of Ohow Investor Consultants, www.ohow.ca, a private investment office set up to help investors manage their portfolios by providing custom-made investment solutions to meet each client's unique requirements.

Hawkins is also co-author of "The New Rules for Retirement - What Your Financial Advisor Isn't Telling You" (2008). He currently lives in Toronto, Ontario.

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