Markets can change overnight. What seemed like a bull market in the early months of 2012 had a major mood swing as news of more trouble in the eurozone once again became front page news. Because of that, traders and investors have to constantly respond to these market changes, especially if their time horizons are short or medium term.

Because exchange-traded funds (ETFs) track the performance of market sectors, the popularity of these funds change as investor sentiment towards certain corners of the market changes. Here are a few sectors to think twice about in the current market environment.

SEE: Building An All-ETF Portfolio

International Markets
If you're a long-term investor, there's little doubt that international market ETFs, especially those tracking the performance of the eurozone, represent a great value play; however, for those with a short-term time horizon, much of the international community may be a place to avoid. For instance, the $5.6 billion Vanguard MSCI Europe ETF has seen performance slip to -16.34% since January. So whether it's an ETF that tracks the performance of the euro or one that follows a specific country's stock index, most experts agree that any resolution to the eurozone crisis is still not within eyesight.

Oil
The U.S. Oil Fund (USO) is down nearly 30% from its March high and if the world's economies continue to remain challenged, USO and the many other ETFs that are levered to the performance of oil, may see further declines. Short-term investors looking to cash in on a technical- or weather-related bounce may consider the oil sector as an ultra-short-term trade, but investors with a medium-term time horizon may still be best advised to stay away.

Utilities
There's no doubt that investors remain scared, and when they're scared they flock to what they consider safe-haven sectors. The utilities sector is one such sector and the performance of the ETFs tracking this sector illustrates that. Since the beginning of April, the utilities sector has outperformed the broader market by a large margin, but that may all come to an end if investors believe that the world market crisis is coming to an end. Risk off will eventually lead to risk on, and when that happens, money is likely to flow out of these ETFs en masse.

SEE: Trust In Utilities

Financials
Moody's recent downgrade of five of the six largest banks proves that the financial crisis that started in 2008 is still not loosening its grip on the banks four years later. For many of those years, value investors have waited for the financials to pay off but other than short term bounces, the financial sector still remains a place to avoid.

Pharmaceuticals
Good market or bad market, everybody needs healthcare and that makes the pharmaceutical sector another safe haven play for investors. The SPDR S&P Pharmaceuticals (XPH) is up nearly 10% in the past six months, compared to the overall market that hovers around flat, but putting money to work in pharma ETFs is a bet that the market will continue to be challenged. As investors have seen in the past, the market has a way of changing its mind rapidly. Investors may not lose a lot of money, but the gains in the pharmaceutical sector may be at their peak, at least for the short term.

SEE: Evaluating Pharmaceutical Companies

The Bottom Line
Every market has opportunities to profit, but part of making money comes from knowing when not to take a risk. In the case of the current market, these sectors and the ETFs that represent them may be best left alone until conditions change. Since markets change every day, some of these sectors may once again represent compelling buys.

Related Articles
  1. Mutual Funds & ETFs

    Top 3 Lazard Funds for Retirement Diversification in 2016

    Learn about Lazard Asset Management, its long history of strong performance and the top three Lazard funds to consider for retirement diversification.
  2. Investing

    3 Healthy Financial Habits for 2016

    ”Winning” investors don't just set it and forget it. They consistently take steps to adapt their investment plan in the face of changing markets.
  3. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  4. Mutual Funds & ETFs

    Top 5 Wellington Funds for Retirement Diversification in 2016

    Discover the top five Wellington Management funds for retirement diversification in 2016, with a summary and performance details of each fund.
  5. Mutual Funds & ETFs

    3 Morgan Stanley Funds Rated 5 Stars by Morningstar

    Discover the three best mutual funds administered and managed by Morgan Stanley that received five-star overall ratings from Morningstar.
  6. Mutual Funds & ETFs

    Top 3 Voya Funds for Retirement Diversification in 2016

    Learn about Voya Investment Management's mutual fund offerings and the three Voya funds to consider for retirement diversification in 2016.
  7. Retirement

    Smart Ways to Tap Your Retirement Portfolio

    A rundown of strategies, from what to liquidate first to how much to withdraw, along with their tax consquences.
  8. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  9. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  10. Mutual Funds & ETFs

    Top 4 Davis Funds for Retirement Diversification in 2016

    Discover the four best mutual funds managed by Davis Advisors that pursue different investment strategies that can help diversify retirement portfolios.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Does mutual fund manager tenure matter?

    Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center