Rotating investments from one industry sector to another to try to beat the market sounds like a lot of work. Whether this is a profitable strategy is another question. For investors who lack the skill or the time to do this efficiently, the Claymore/Zacks Sector Rotation (AMEX:XRO) ETF is a fund that does the rotating for you. The exchange-traded fund uses a proprietary quantitative method developed by Zacks Investment Research to identify and invest in sectors with potentially superior risk-return profiles compared with the S&P 500.
A look 'round the index
Zacks culls 100 candidates for the index from the 1,000 largest U.S. equities and American Depositary Receipts listed on U.S. exchanges. Zacks uses a multifactor selection process to analyze 16 sectors and allocates assets to those offering the greatest risk/return potential using relative value, insider trading, price momentum, earnings growth, earnings estimate revisions, and earnings surprises, as well as quantitative macroeconomic factors.
Sector exposure
Index exposure for any one sector can range from zero to 45%, which means it's very important to select the right mix. The fund's top sectors now are finance (38%), energy (2%), and consumer discretionary (20%) -- all below their maximum allocations. Because the Claymore/Zacks Sector Rotation ETF rebalances every quarter, there may be more exposure to a sector at some point in that three months that is more than optimal, based on market changes.
No individual stock will take up more than 5% of the index. The fund's largest holdings include Kohl's (NYSE:KSS), Target (NYSE:TGT), and Loews (NYSE:LTR).
Pros and cons
The fund, like a number of new ETFs and the indexes they follow, doesn't have a long-term track record. Zacks has an excellent reputation, but the index that the fund tracks was created in September of 2006 and has a limited life. There simply is not enough return data for the fund and its index to see how they might perform over a full market cycle, and that's a concern. Bet on the wrong sector and you lose, which is why diversification in this approach is a good thing. To get a sector allocation strategy for a fee of 60 basis points does seem like a pretty reasonable deal. The Claymore/Zacks Sector Rotation ETF has a 17.36% cumulative return since its inception, performing well so far.
The Motley Fool's Shannon Zimmerman interviews money managers for his Champion Funds newsletter. See the latest interview and his take on mutual funds with a free trial.
Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.
