ETF strategies for tackling a down market?

Exchange Traded Funds (ETF's) are rapidly becoming a popular investment tool for many investors. As with any investment, it is important to understand the downside risks.
ETFs are traded like stocks, so they inherit many of the same risks as stocks. However, there are several strategies that ETF investors can use to protect their capital during a down market. These strategies include knowing when to sell, knowing how to allocate your assets, following the rotation of sectors and using hedging techniques.
Sell Your ETF Knowing when to sell your ETF is just as important as knowing when to buy it. Many investors do not know when to sell and they tend to hold on to their shares hoping things will improve. Unfortunately, it may be a long time before they fully recover. During a down market, there are several reasons investors should consider selling their ETFs:
Risk Tolerance: Every investor should know how much risk he or she can tolerate. If you are having trouble sleeping at night due to concerns over the market, then you have reached your limit and it is probably a good time to sell. You've already made the losses, so now it's time to save what's left. Stop Orders: Stock investors have long used stop orders to protect their portfolios. Fortunately, investors in ETFs can use the same stop techniques available for stocks, such as trailing percent stops, limit stops, volatility stops or some other variation that helps close out a position at a predetermined amount.
Ready Money: If you will need the cash for some purpose in the next couple of years, it is a good idea to reduce your risk and move your money to a low-risk investment now. Investors can move to less volatile ETFs or sell for cash to preserve gains should the market turn down.
Balancing Act: Rebalancing your portfolio is always a good idea. Should your ETF run up in value, providing a nice gain, it might overweight your portfolio toward one sector or industry. A good strategy is to sell part of the ETF to capture the profits and then diversify your reinvestments. This approach protects your profits should the market take a dive. Expectations: Investors who beat the market may find that their initial reasons for purchasing an ETF have changed. Maybe it failed to meet your expectations, or the fundamentals underlying the investment changed for the worse. When this happens, it is a good time to sell and move on to another opportunity.