Green Transit ETF May Motor in Bull Market

Investors can create specific portfolio scenarios by using specialized exchange traded funds. They can target industries, regions and trends without having to pick individual stocks.

Invesco's PowerShares unit has been a leader in specialized ETFs. Its Global Progressive Transportation Portfolio(PTRP Quote), which tracks green transportation trends, is one of its more notable funds.

Even though specialized ETFs haven't gained traction with investors, the funds can help manage volatility in a portfolio and take advantage of the stock market's cycle. The performance of specialized ETFs like the Global Progressive Transportation ETF depends on both industry developments and big-picture trends.

Anyone who considers investing in such a fund should look at it from both a "bottom up" and "top down" perspective. Investors need to research the financial state of the companies the fund holds, the demand for their products and industry trends. They must also weigh macroeconomic factors, such as the direction of the market.

Small companies usually outperform as bear markets turn bullish. Investing in green transportation companies could be a risky bet, but they could deliver bigger returns than mega-cap conglomerates early in the market cycle. Large companies tend to lead in the later stages of a bull market.

This is an important aspect of navigating market cycles. In the early stage of a bull market, it makes sense to increase a portfolio's volatility. As the bull market matures, investors should reduce volatility.

When considering a portfolio's sector breakdown, the Global Progressive Transportation ETF should be viewed as part of the industrial weighting. For some investors, it might make sense to devote half a portfolio's industrial allocation to the PowerShares fund and the rest to a broader industrial fund, such as the Industrial Select Sector SPDR ETF(XLI Quote). Later, it might make sense to rebalance the segment so that 25% of the weighting is in the PowerShares fund and 75% is in the other ETF.