1. Diversification
The immense complexity of global markets calls for an active and effective asset allocation strategy to preserve and grow wealth. Various approaches can be taken using ETFs to deliver diversified market exposure and active market participation.
a. Buy-and-hold investing
An investor can use a portfolio of ETFs to achieve a strategic asset allocation based on time horizon, financial objectives and risk appetite. Periodic rebalancing can help maintain the portfolio's original allocation, or the allocation can be incrementally changed to become more conservative over time as the investment horizon nears.
An investor can build a well-diversified ETF portfolio with exposure to various asset classes, investing styles and geographic regions. The relatively low cost of ETFs can help maximize net returns.
b. Core-and-satellite investing
A core-and-satellite strategy starts with building the core of the portfolio with ETFs that provide broad market exposure, including allocations to fixed income and equities. The core portion can serve as the long-term foundation of the portfolio delivering market performance and provide a sense of stability.
The other, more tactical ‘satellite’ portion of the portfolio can be used to express a view or take advantage of perceived market opportunities through access to specific industries, sectors, factors, regions, countries, commodities, or even macroeconomic trends.
Investors can effectively use ETFs to express their views and complement the core holdings in their portfolio.
c. Thematic or tactical investing
ETFs can be used within a portfolio to make short-term tactical adjustments to the asset mix to over- or under-weight certain styles, regions or industries, without having to invest in individual securities. This allows investors to respond to overall macro ideas while avoiding security-specific risks.