The stock market has been the pits lately.

But not everybody is losing money. As of last Wednesday, stocks in the tobacco industry were up 40 percent, on average in the last three months. Aerospace, home construction, and healthcare providers, all gained more than 20 percent, on average, in the same time span.

Investors in the right industry sectors can make money, even in rough markets. Exchange-traded funds give you a new vehicle for doing that, but first you have to identify suitable industries.

Several sites furnish tools for spotting up and coming industry sectors. I use Big Charts because it’s flexible and easy to use.

Big Charts Nails Hot Industries
Click on Industries from the menu at the top of Big Charts homepage (www.bigcharts.com) to see the list of the 10 best and 10 worst performing industries, for the past three months. You can use the dropdown menu to select different time spans ranging from one-week to five years.

I usually focus on years-long trends, but not here. Industries rapidly move in and out of favor. You can expect a particular industry to outperform the market, for at most, six months to a year. You have to spot a hot industry early, and hop on it before it loses steam.

With that in mind, select "1-month" from the dropdown menu and print the resulting list of best and worst performing industries. Then, use the dropdown menu to change the time span to "1-week" and print that list. When I looked on October 18, I found healthcare providers, medical supplies, and pharmaceuticals among 10 best performing industries on the one-month list. Medical supplies, pharmaceuticals, pharmaceuticals and biotechnology, and healthcare were among the industries included on the one-week 10 best list. (You can see a list of the 10 strongest and weakest performing companies making up each industry by clicking on the industry name.)

Each of these healthcare sector industries were up from 10 to 14 percent over the past month, and managed gains ranging from three to five percent during the last week. The overall market, as measured by the S&P 500 Index, racked up losses of 7 percent, and 1.7 percent, respectively, for the same periods. Clearly, at least some segments of the healthcare sector are moving up in this generally weak market.

Aerospace was the only other industry showing up on both the one-week and one-month 10 best lists.

Investing in Hot Industries  
How do you put your money into hot industries once you’ve identified them? One way is to buy the top stocks in the industry. An easier strategy is to invest in industry specific mutual funds, enabling you to move in and out of a sector with a single trade. Fidelity Investments (www.fidelity.com) and Rydex Funds (www.rydexfunds.com) both offer a selection of industry specific funds designed for that purpose.

Exchange-Traded Funds  
Exchange-traded funds (ETFs) give you a new, and potentially easier, way of investing in specific industries. ETFs are similar to mutual funds, except they trade like stocks. You can buy and sell ETF shares through your Web broker, most require no minimum investment, and there is no minimum holding period. You pay the same brokerage commissions as you would for trading any other stock.  

Most mutual funds trade only once a day, after the market closes. ETFs, on the other hand, are priced continuously and can be traded any time during the trading day. ETFs can be bought on margin, and can be sold short if you think the industry is headed down. 

The first ETF, Standard & Poor’s Depositary Receipts, nicknamed Spiders, was introduced in 1993 to emulate the S&P 500 Index. Subsequently, other ETFs were developed to emulate the Dow Jones Industrial Average and a variety of other market indexes.

The first industry specific ETFs, State Street Bank’s SPDR Funds, representing nine major sectors, were brought to market in December 1998. Barclays Global Fund Advisors’ iShares, emulating 14 Dow Jones industry indexes, debuted in June. Another new ETF family, Merrill Lynch’s HOLDERS, lets you invest in 11 narrowly defined sectors such as broadband, semiconductors, and the like. But there is a drawback; HOLDERS must be traded in 100 share lots. For example, biotech HOLDERS recently traded at $180, making the $18,000 minimum purchase too high for many investors.

Researching ETFs  
Exchange traded funds are traded on the American Stock Exchange, and the AMEX site (www.amex.com) is the best place to research the funds. 

Click on Index Funds on the top menu, and then on Sector Indexes to see the list of industry ETFs. I found only one ETF that might work for the healthcare industries pinpointed by Big Charts; iShares’ U.S. Healthcare Sector Index Fund.  

Click on the fund name to research the ETF. Scroll down to view the fund’s top ten holdings, and its portfolio distribution among industry groups. Most of the Healthcare fund’s assets (80 percent) are in large pharmaceutical companies such as Pfizer and Merck. About 14 percent of the holdings were in medical product makers such as Medtronic and Guidant, and the balance of the portfolio was made up of healthcare providers such as HCA and UnitedHealth Group.

It’s up to you to interpret the portfolio information and decide if the ETF is representative of the hot industries pinpointed by Big Charts. For my money, the Healthcare Fund looked close enough.

There were no ETFs listed that equated to aerospace, the other hot industry besides healthcare I found on Big Charts.

Barclays’ iShares, aren’t ideal, because the industries are too broadly defined, but they are the best currently available for industry timing. Many new ETFs are in the planning stage, and we’ll soon enjoy a wider selection.