As a refresher before we go more in depth:

Mutual Funds: An investing vehicle that you purchase shares of that will track an underlying basket of stocks. Can be broad based as in Vanguard Total Market Index Fund or very focused such as Fidelity Select Medical Delivery Fund. These mutual funds are considered open ended and can continue to grow as large as the fund manager sees fit by continuing to buy additional shares of the underlying stocks when new investors purchase shares of the mutual funds.

ETF's: Somewhat of a variation on the traditional fund. These trade like stocks on the open market all day. They are usually unmanaged and track specific indexes. They can be broad based like the QQQ which tracks the Nasdaq 100 Index or very focused such as the iShares Medical Devices Sector fund IHI.

This article is not designed to get into the argument of Active vs. Passive managed funds or efficient vs. inefficient market hypothesis, but rather to show you strategies for how you can add "Alpha" (the outperformance of value add of a particular strategy over the benchmark index) by rotating some sector strategies based on where the business (or economic) cycle is.

One of the benefits of mutual funds or ETF's is that they enable you to invest in a certain segment of the market without having to choose one specific stock. This way you take part in that sectors potential growth without worrying that the stock you selected may not be the "winner" of the group. With the advent of sector specific mutual funds and ETF's you can now allocate a portion of your portfolio into specific sectors you believe will outperform the general market.

HOW CAN A PERSON DETERMINE WHAT WILL OUTPERFORM?

Unfortunately there is no guarantee on what sector will outperform, but utilizing the above chart on where you believe the business cycle is and a little historical research on which market sectors perform best in each cycle may give you that opportunity to boost your performance in excess of the market returns. Let's explore:

Stage 1: coming out of recession (or early bull market) the sectors that typically lead are Financials, Technology and Consumer Discretionary areas.

Stage 2: well into the bull (mid to late bull market) the sectors that typically lead are Materials, Industrials, Energy and Telecom.

Stage 3: the bull transitions into a bearish market so the defensive sectors begin to outperform: Healthcare, Consumer Staples, Utilities.

ETF'S: There are several companies that offer ETF's that target specific sectors. Here is a brief listing: iShares, Spyders, PowerShares, Proshares

Mutual Funds: This is more limited as most mutual fund companies frown upon trading in and out of their funds. However a few fund families offer sector specific options: Fidelity Select shares, Rydex Funds and ProFunds.

Where are we in the current cycle?

I will let you do your own homework on that one. However, if you pulled up a chart of Utilities, Healthcare and Consumer Staples you might be surprised with the outperformance of late............