Buy These ETFs to Profit from "Sector Rotation"

Investors have been pouring a lot of money into relatively “safer” or so-called “defensive” sectors during the last few months. These sectors have also benefited from investors’ insatiable appetite for yield in the current rock-bottom interest rate environment, as most of the companies in these sectors are mature, slow-growing, dividend paying companies.

As a result, valuations of these sectors have soared and some of them look overpriced now. Defensive sectors like healthcare, staples and utilities are now trading at an average premium of more than 10%, up sharply from ~40% discount to the broader market in 2009.
On the other hand, many fast-growing sectors have largely been ignored by investors. But the trend appears to be changing now.  Fund flow trends and sector returns for the last month show that investors are slowly moving into “riskier” corners of the stock market.

Once the economic picture begins to improve, many more investors would be tempted to move to cyclical stocks. It may be the right time for investors to look at sectors with brighter longer-term growth potential, which look rather attractively priced now.
At the same time, some portfolio allocation to defensive sectors is warranted as those sectors will continue to perform well if economic recovery shows signs of slowing down.

Sector	ETF	Year to date return	1 month return	1 month flow (million)	FY 1 P/E*
Utilities	XLU	16.32%	1.31%	-3.74	16.47
Consumer Staples	XLP	21.31%	5.17%	-386.24	18.23
Healthcare	XLV	24.23%	4.82%	-534.74	15.84
Technology	XLK	10.37%	6.16%	401.39	14.24
Industrials	XLI	15.87%	8.00%	43.67	15.32
Materials	XLB	9.68%	9.92%	-192.27	15.31

*Based on forecasted fiscal year earnings, Source: SPDR website
Vanguard Information Technology ETF ( VGT - ETF report )
Launched in 1998, this is one of the largest and most liquid products in the technology ETFs space. It manages about $3 billion in assets, which are currently invested in 414 holdings. (more)
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