NEW YORK (TheStreet) -- Index Universe recently published an interview with well-regarded investment manager David Kotok from Cumberland Advisors about using ETFs to build a portfolio at the sector level. The interview focused on Cumberland's process and used the health care sector as an example of how to use multiple funds to create the desired exposure.
The iShares S&P Global Materials Sector Index Fund ( MXI) is obviously global, has 50% in metals and mining and only 40% in chemicals. Over the last few years the boom was in mining stocks, not chemical stocks, and so going into the May 2008 peak for the sector the trailing 12-month return for MXI was 32% vs. just 15% for XLB. However, while the boom times were been better for the mining-centric MXI, the last 12 months were not so kind as MXI has lagged badly going down 14% compared to just 6% for XLB. For one final example, let's look at the allocation our firm has for client accounts in the industrial sector. We use a very similar approach as Kotok and Cumberland but include individual stocks. For ETFs in the sector we use the PowerShares Water Portfolio ( PHO), which is 58% industrial stocks and has a much smaller market cap than the sector benchmark Industrial Sector SPDR ( XLI). The other ETF we use is the iShares S&P Emerging Markets Infrastructure Index Fund ( EMIF) and although only 32% in industrials we believe the composition of the fund makes it a fit for this sector. It has a trailing yield of 3%. We combine those funds with individual stocks Volvo ( VOLVY), ABB ( ABB) and Northrup Grumman. 12 Highest-Rated Consumer Stocks Picked by S&P >> While our mix could fare poorly depending on what the market has in store, it obviously captures plenty of foreign and thematic segments within the sector and a dividend yield that is quite a bit higher than XLI.