Follow the Money: Discover The Best Sectors In Bull Or Bear Markets Using ETFs

You’ve surely heard of traders, investors, and fund managers who manage to thrive no matter what the markets dish out.  In raging bull markets and gut-wrenching bear markets alike, these mavens stay afloat.

Toni’s Market Club, we strive to do just that.  And we derive our ability to take profits from both uptrending and downtrending markets from our knowledge of how “follow the money.”

What does “follow the money” mean?  It’s a Wall Street saying that refers to the times when the “smart money,” meaning the financial institutions, portfolio managers and fund managers move their funds from one sector to another to take advantage of the market environment. . .  and we “follow” them.

Why do we sometimes move our money from one sector to another? Because the financial markets of developed nations move in cycles.  In uptrending markets, certain sectors routinely move higher—and typically gain fatter profits than do other sectors.    In downtrending markets, or corrections, a different set of sectors move higher, or at least remain more stable than their high-momentum counterparts.

The trick is knowing which sectors represent the best places to put your money during good times, as well as the not-so-good times.

Sector Basics

Before we dive into the strategy, let’s talk sector basics.  We can divide the economies of industrialized economies into different business groups we call “sectors.” Each of these sectors share similar products or services.

Examples of these sectors include industrials, materials, financials and utilities. Further, we can divide these sectors into sub-sectors, or industry groups.  For example, the health care sector is comprised of industry groups that include companies in the business of pharmaceuticals, biotechnology, medical equipment and health care providers.

Because each sector has different characteristics, each presents a different risk profile.  Think of it this way:  Some people don’t go outside during a rainstorm and others love to walk in the rain.  In the same way, certain sectors thrive in bull markets, while others jump into the spotlight in bear markets.

A Good Way to Go:  Sector Exchange Traded Funds (ETFs)

One of the easiest ways to move money into specific sectors is to use exchange traded funds (ETFs).  Each sector ETFs is comprised of a number of equities whose businesses participate in the fund’s designation.  As well, because each ETF has several holdings, they are naturally diversified, which minimizes risk.

Two well-known sector ETF fund families that we use in Toni’s Market Club to “follow the money” are the Select Sector SPDRS (nicknamed “spiders”) at sectorspdrs.com and iShares sector funds at ishares.com.

Below, I’ve listed the ten sectors in the S&P 500 benchmark index and related Select Sector SPDRS ETF symbols that tend to do earn gains in either bull markets, or bear markets.

Select Sector SPDR ETFs that Typically Thrive in Bull Markets

  • Industrials (XLI)
  • Materials (XLB)
  • Consumer Discretionary (XLY)
  • Energy (XLE)
  • Financials (XLF) (can also be defensive)
  • Technology (XLK)

Select Sector SPDR ETFs that Typically Do Well in Bear Markets

  • Health Care (XLV)
  • Consumer Staples (XLP)
  • Utilities (XLU)
  • Real Estate (XLRE)

If you are active in the markets, you probably know sector moves are fluid. We know that the health care sector can thrive in bull markets as well as be a “go to” escape during market drawdowns.  (Our medications are necessities).  As well, consumer staples (such as Proctor & Gamble (PG) and Johnson & Johnson (JNJ)) may climb higher during bull markets, even though they are popular hide-outs during bear markets.  Also know that in nasty bear markets, no sector is sacred.  In highly negative scenarios, even the utilities sector—considered to be one of the most popular safe havens—can head south.

In both uptrending and downtrending markets, knowing how to “follow the money” is one of the smartest skill-sets you can own. After all, while earning money is certainly important, capital preservation is the key to success.