ETF Investing: Two Strategies

NEW YORK (TheStreet) -- The ETF universe is expanding, and investors can now construct a variety of short- and long- term strategies from a large pool of funds.

The ETF industry has been popularized by both narrow sector funds, like United States Natural Gas(UNG), as well as broad index funds like the SPDR S&P 500 ETF(SPY).

While the number of ETFs entering the marketplace may seem overwhelming, the sheer number of funds allows for a greater customization when creating a portfolio. Each investor has different goals and objectives, but the two primary categories into which my ETF clients fall are those who use a fundamental strategy and those who use a sector strategy.

Fundamental ETF Strategy

Fundamental ETF portfolios are suitable for investors looking to take advantage of the cost efficiency and tax efficiency of ETFs over time. A well constructed, lightly traded, fundamental portfolio can provide investors exposure to the broad market, as well as cater to their individual needs for income, over a sustained period of time.

A well balanced fundamental approach often has a broad market fund like SPY or PowerShares QQQ(QQQQ) at the heart of the lineup. Depending on how much income the individual investor needs, these strategies will also often include a fixed income position or dividend fund like iShares Dow Jones Select Dividend Index(DVY).

Several of my clients cite tax concerns as the primary reason for gravitating to fundamental ETF strategies. Buy-and-hold ETF investors can avoid paying excessive capital gains and wind down losses over time. It makes tax season less stressful.

Sector ETF Strategy