ETFs highlighted in this article include: Market Vectors Gold Miners ETF (GDX), PowerShares Global Gold and Precious Metals ETF (PSAU), Pharmaceutical HOLDRs ETF (PPH), and PowerShares Dynamic Leisure and Entertainment ETF (PEJ)

For many investors a top-down approach to stock selection makes perfect sense. First thinking about the economy in a macro sense to identify the sectors likely to outperform the market, then paring that into more specific industries and eventually narrowing that group down to a few select companies.

However, one of the most painstaking tasks that investors face on a daily basis is selecting individual companies that would make good stocks. The main reason this is the most difficult is that the vast majority of volatility comes from uncertainty in the individual company, not over all market risk.

Lower Your Risk, Save Some Time
If greater than 75% of a stock’s volatility is from individual stock selection, why not avoid that all together? By using sector or industry specific Exchange Traded Funds (ETF) an investor can isolate areas of the economy that they feel will outperform the market and put money in those companies. The added benefit is the diversification amongst many companies through a single transaction.

Now that we can easily avoid sifting through thousands of stocks we need and efficient and, more importantly, accurate tool to select areas to focus our portfolio. Fortunately the Zacks Industry Rank is perfectly suited for this task.

The Zacks Industry Rank rates industry groups based on the aggregate Zacks Rank of individual stocks within those groups. There are 217 industries and a general rule of thumb is that the top 70 are good areas to invest in. I have selected a few ETFs that have holdings that closely align with some of the top ranked industries.

Market Vectors Gold Miners ETF (GDX) is an excellent opportunity to get exposure to a broad range of gold miners. Currently the gold mining industry is rated at the 14th best industry using the Zacks Industry Rank. The aggregate Zacks Rank for the group is 2.44, up from 2.52 one week ago. This move may not seem significant, but for the aggregate rank of 25 companies to move that much it takes a significant amount of upward revisions.

PowerShares Global Gold and Precious Metals ETF (PSAU) will provide exposure to several different metal miners, which could be very beneficial because silver miners are the third highest industry. Also, gold and other precious metals are great hedges against inflation.

Pharmaceutical HOLDRs ETF (PPH) invests in the common stock of 21 generic and brand-name drug makers. Generic drug producers are tied for the 9th best industry with an aggregate Zacks Rank of 2.33. Other pharmaceuticals are ranked as the 25th best industry. These companies are classic defensive holdings in bear markets.

PowerShares Dynamic Leisure and Entertainment ETF (PEJ) invests in a variety of fast food, casual dining, and entertainment companies. Movie and TV production companies are tied as the 25th highest sector as consumers shift toward cost effective entertainment options. Restaurants are currently the 20th rated industry.

The Tip of the Iceberg
With the popularity of ETFs exploding, it seems that new funds are launched daily. Be sure look for those funds that closely match the sectors and industries you are targeting. Also, be attentive to the changes in the Zacks Industry Rank to keep your portfolio in optimal position to out-pace this turbulent market.

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