Unlike most managers who use fundamental analysis to build portfolios, Rob Stein takes a top-down approach to investing.

That's due to the fact that the managing partner and senior portfolio manager at Chicago-based Astor Asset Management uses only exchange-traded funds.

Unlike with individual stocks, fund research based on business fundamentals requires scrutinizing sector and asset class characteristics. By its very nature, stock-specific fundamental analysis shifts the emphasis to more of a bottom-up approach, says Stein.

Combined with his training as an economist, he says ETFs fit his research discipline and investing style to a tee.

"Our expertise is analyzing overall economic trends," said Stein. "Realizing where we're at in any given business cycle is essential to making prudent long-term investment decisions."

Besides reviewing ETF money flow patterns, Astor's portfolio managers say they emphasize employment data in their research process. For example, when labor conditions started to deteriorate across most sectors early last year, Stein and his team decided it was time to exit funds with direct exposure to several of the most hard-hit sectors.

At the same time, the firm's managers spotted that transportation as a whole was adding workers. So they established positions in the iShares Dow Jones Transportation Average (NYSE: IYT). In the second quarter when employment slipped at many transport companies, the team sold its stakes in the ETF.

"Our mantra is that if more people are working and creating more goods and services, a market or sector will expand," said Stein, a former-Federal Reserve analyst who worked under Paul Volker.

Before branching out on his own, Stein served as a trader and portfolio manager at a number of financial services firms, including Bank of America and Barclays Bank. He also has written three books. The latest is "The Bull Inside The Bear" published by John Wiley & Sons.

Astor manages some $200 million in assets for high net worth and institutional investors. Stein says Astor has used ETFs to build long-term-oriented portfolios since it opened in 1994.

No Wholesale Churns

Does taking an economist's view of the markets churn portfolios a lot for investors?

"Economic trends tend to last longer on the upside, but even on the downside they don't turn in a day," said Stein.

In an average year, he says the portfolios are tweaked about once a year. In more-difficult environments, the firm's managers say major adjustments could come as much as twice in a 12-month period. But Stein stresses those changes are typically only partial moves, not wholesale churning of positions.

"We don't make a change unless there's a fundamental reason to adjust positions or rebalance allocations," said Stein.

His strategy hasn't produced back-to-back quarterly losses. And the longest down period recorded by the firm for its investment portfolios has been five quarters. Astor says its clients had negative annual returns for the first time in 2008. Average portfolios losses were around 4%, according to Stein.

By comparison, the Vanguard Total Stock Market ETF (NYSE: VTI) lost more than 36% last year.

Stein describes current market conditions as bearish. But he sees pockets of opportunities. "We believe the economy is more than 50% through its contraction," he said. "We're actually optimistic about when it will turn the corner as some sectors are showing positive signs now."

Stein added: "By the fourth quarter of this year, it appears the worst will be behind us and the general economy will start expanding."

In fact, he expects several industries to finish with positive returns by year's end. Those include utilities, retail and semiconductor sectors.

A recent purchase by the firm is the Utilities Select Sector SPDR (NYSE: XLU). Stein says employment trends are stronger in that sector than the overall economy.

Astor has also established positions in the SPDR S&P Retail ETF (NYSE: XRT). "XRT has been flat this year while the broader market has slid more than 19%," said Stein.

In retail, analysts at Astor track consumer spending, which accounts for some 70% of the country's GDP.

"Consumer spending dropped by $500 million in the fourth quarter. That's an unsustainable drop with an unemployment rate of 8.1%," said Stein.

The recent outperformance of XRT—it was down nearly 2.5% so far this year early Thursday—suggests that consumer spending will pick up, according to Astor's analysis of the data.

"XRT's index is cognizant of market conditions and how they're playing out in the market," said Stein. "The ETF's performance is providing us with indications that consumers will return to more-normal patterns as the economy works its way through the recession."

Another move by Astor has been with the Semiconductor HOLDRs (NYSE: SMH). Its returns are down just slightly this year. That's after a drubbing last year where it lost more than 45%.

Historically, chip makers react quicker to slowdowns, says Stein. "At this point in the cycle, they're leaner and more efficient. So the very last part of this recession hasn't impacted semiconductor manufacturing as much as other sectors," said Stein.

China: Bounceback In 2009? 

Stein says he's also bullish on prospects for a 2009 rebound in China. He's investing in the iShares FTSE/Xinhua China 25 Index (NYSE: FXI).

"China's stimulus package is bigger than ours and because of the way its government works, when they make a decision to go ahead with an economic revival plan, it can be implemented almost immediately," he said.

China is creating a middle class about the size of France every year, Stein observes. "So it's basically building its own consumer base," he said.

Still, the firm's managers own some of the Short S&P 500 ProShares ETF (NYSE: SH), a position they've held since early last year. Stein says while he's seeing opportunities in specific sectors, the broader market is still slumping. He's planning on waiting for confirmation of a broad recovery before opening long positions in more-diversified index-based ETFs.

"It's very difficult to pick a bottom for an entire economy," said Stein. "But we really don't think that's necessary at this point to be a successful investor."

Instead, he prefers to segment growth and contraction patterns by sectors. Economic cycles move in various stages through different markets, says Stein.  

"Right now, we're seeing enough fundamental strength in the economy to invest in several different sectors," he said. "We've found that it's much more important to get the direction of the markets right than the specific timing of an overall economic recovery."