A portfolio of sector-based exchange-traded funds (ETFs) offers investors a lower-risk way to participate in the cyclical nature of the economy and the market. ETFs offer investors a way to reduce their risk by diversifying their exposure to individual stocks. Sector rotation is an investment strategy that seeks to buy and own ETFs that hold shares of companies in industries that should outperform the market. If you want to reap the benefits of an industry-based ETF portfolio, here are five steps to take.

By following these steps, you will create a sector portfolio with ETFs that should generate high returns and help you get a good night’s sleep.

  1. Identify the market trend for the next year. One year is enough to remove it from the daily movement of the market. However, it is close enough to have a reasonable perspective of the economy and the market.
  2. Identify the top three industry sectors within this trend that are most likely to beat the market. These sectors will lead the market and is where you should focus your time. This will require some homework on your part to evaluate the economy and industries. Many professional investors use industry rotation as part of their strategy.
  3. Choose your ETFs based on your preferred sector, choosing at least 3 but no more than 10. The exact number depends on those available and the time you have to monitor them. The more you choose, the more time you should spend monitoring each one. Over time, you will add new ETFs to this list, so it is best to start with a few and add to that number over time. I like to have no more than 10-15% in each ETF, although that’s not a hard and fast rule. Depending on your assessment of the market, you may own 20% of an ETF that you think will perform especially well.
  4. Select the optimal buy, stop and exit targets for each ETF. These prices frame the risk-reward of your investment decision. The idea is to buy with drops in price to get the best price. Then use trailing stops that initially protect against a loss. Later, when your ETF has risen in price, the trailing stop can help you capture your profits if the market suddenly drops. Exit targets provide price profit taking as your ETF reaches its highest point in the cycle. I like to sell half of my position on the first exit target to make sure I make a profit. This money is used to buy a sector ETF that is about to start its cyclical rise. I let the remaining half run further using the trailing stop or the second target to close the position.
  5. Manage your ETF portfolio. This does not mean keeping an eye on the stock price every day. Instead, he continues to do his homework on the market in general, each sector and their ETFs, looking for problems that would make him change his investment topic. As you pass each three-month anniversary of purchasing an ETF, ask yourself the question, “Knowing what I know now and the price these ETFs are currently trading at, would you be willing to invest new money in the sector under these circumstances if you still didn’t you hold a position? “If the answer is no, you should carefully examine your reasons for holding the fund. As time goes on, you’ll add sectors and ETFs that are doing well to your portfolio and sell those that are reaching the end of their current trend. With this approach, your portfolio stays in the best sectors and moves away from the sectors that are in decline.

Creating a portfolio takes time and patience. By following these steps, you build a portfolio that remains positioned to take advantage of the cyclical nature of the market. Get started today as you are responsible for your financial future.