This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

How to Add Alpha Using Tactical ETFs

NEW YORK (FMD Capital Management) -- Constructing a well-balanced portfolio takes time, tools and discipline in order to implement a plan that will meet your goals. My preferred investment vehicle to construct a diversified portfolio is the exchange-traded fund. I love ETFs because they are low cost, transparent, liquid and easy to trade. They allow you the ability to set automatic stop losses as a function of managing risk and have greater flexibility than a traditional mutual fund.

As I wrote several months ago, the first step in this process is selecting core holdings that will be the foundation from which you can ultimately expand. These core positions will give you broad-based exposure and directional bias in the market to keep pace with rising stock prices. However, a core position will take you only so far. Ultimately, getting exposure to specific sectors or tactical trading ideas will shape your portfolio to your specific investment preference.

Tactical positions represent a sector, industry group or special situation that you want to take advantage of. These positions often start out as short-term trades then turn into long-term investment themes. They give you a measure of overweight exposure to a certain area of the market that you feel is offering excellent potential for capital appreciation.

I typically recommend allocating anywhere between 20% and 30% of your portfolio toward tactical ETF opportunities and keeping a measure of cash on hand for new themes that may present themselves. That way you can actively shift your holdings to take advantage of new trends or capitalize on an innovative strategy when the timing is right. In addition, I always recommend pairing new trades with a sell discipline to guard against the potential of a reversal.

Now let's take a look at some of the different types of tactical ETF opportunities:

Sectors

One of the easiest ways to add instant tactical exposure to your portfolio is to select a sector fund. By owning an ETF that invests only in technology or health care stocks you can get pinpoint exposure to a group of companies that are in a similar economic segment. I recently profiled how Fidelity launched 10 sector ETFs which are the cheapest in the industry when compared to larger and more well-established competitors.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,104.00 -9.54 -0.06%
S&P 500 1,988.64 +5.11 0.26%
NASDAQ 4,478.64 +22.6240 0.51%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs