David Kotok of Cumberland Advisors is one of the most established ETF-focused financial advisors in the world. With $1.9 billion in assets under management and a 39-year track record, Cumberland has been a leader in the independent, fee-for-service money management business through multiple booms, busts and fads.

Kotok recently published a book—“From Bear to Bull With ETFs”—explaining how he uses sector-based ETFs to invest during both boom and bust cycles in the market. IndexUniverse’s Global Head of Editorial, Matt Hougan, who wrote the foreword to the book, caught up with Kotok recently to discuss the book and his outlook for the market today.

IndexUniverse: You recently wrote a book on sector investing with ETFs. Why are sectors a useful way to approach the market?

Kotok: The benchmark for the U.S. stock market is the S&P 500 Index. It is composed of sectors and they are key to gaining performance. The ETF choices among the sectors facilitate this process. Choosing a sector to overweight or underweight requires macro inputs and a rationale for the decision. This is coupled with selection of broader characteristics such as growth vs. value or large-cap vs. small-cap. In some cases, you can combine them.

IndexUniverse: Which two U.S. sectors look the most attractive to you right now and how are you investing in them with ETFs?

Kotok: We like the health care sector. The broad-based ETF is XLV [the Select Sector SPDRs – Healthcare (NYSEArca: XLV)], and we hold it.

This sector has been maligned for years. Prices of the stocks were depressed because of fear of government intervention in the industry and imposition of price controls. We think all the bad news is known and the stock prices reflect the worst-case outcomes. Meanwhile, the health care industry, in the broadest sense, is 17 percent of the U.S. GDP and growing. The growth is unstoppable since we have a more affluent, aging population. Thus, the ETFs are cheap.

In addition to XLV, we like the health care equipment companies. They are more resistant to government intervention, which tends to focus more on the drugs than on mechanical devices or passive equipment. Thus, we like IHI, the iShares ETF [iShares Dow Jones U.S. Medical Devices ETF (NYSEArca: IHI)]. An additional way to play the health care sector is in the smaller-cap growth companies. PowerShares has a small-cap health care ETF that has characteristics that delve into the growth possibilities. Our choice ETF in this space is PSCH [the PowerShares S&P SmallCap Health Care Portfolio (NYSEArca: PSCH)].

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