If you are a trader or investor, you probably know that including sector exchange traded funds in your portfolio can be profitable.
But aside from trading these funds, I also use sector ETFs as decision-support tools when I’m targeting a stock to purchase. Here’s why…
During any trading day, most stocks fluctuate in price according to these three dynamics:
1) movement of broad market (S&P 500),
2) movement of sector or industry group in which stock resides, and
3) individual company news.
Because I know that which sector my stock is in has a substantial influence on that stock’s moves, it makes sense that I want my position to be a component of–or related to–a sector ETF that’s in favor and moving higher, rather than in a fund that’s out of favor and losing ground (and money). In other words, you want your stocks to be on a winning team, rather than a losing team.
Once I determine which sector or industry group my target stock resides in, I then bring up a daily (or weekly) chart of the related ETF. Is the sector ETF in favor and trading in an uptrend? If so, that knowledge (along with other research) may confirm my decision to buy. For a free list of sector and industry group ETFs, go to ToniTurner.com, click on “Education” on the top tool bar, then click on “Sector ETFs.”
Alternatively, if I find that my stock is related to a sector ETF that’s falling in a downtrend and out of favor—a “losing team” –I may decide to skip the stock, for now.
My reasoning: even stocks that outperform their sectors for a period usually cannot fight their “team’s” downtrend for an extended period. So, if I target a stock for a long-term trade, I prefer it to reside on a “winning sector team.”
Over the years, I’ve found the sector ETF confirmation to be so valuable that I use it every week for my stock recommendations in Toni’s Market Club. And I give “the ETF to Follow” to our members with each trade.
Before you purchase a stock, checking the sector or industry group ETF for strength or weakness can be a smart point to add to your checklist. I also believe it’s also good risk management to keep an eye on the sectors or groups where your positions reside, in case one of them makes a rapid turn that influences your stocks’ prices.
All in all, knowing which “team” or sector ETF your target stock is related to, and then watching that ETF for future direction can make you, and save you, money!