ETFs can be used to implement a variety of short and long term investment strategies. Some uses are strategic - for example, asset allocation - while others are tactical. Whether it makes sense to use ETFs in a particular strategy depends on a number of factors, including the amount invested, holding period, trading costs, appetite for risk and more. Here are some of the most common ways investors put ETFs to work in their portfolios.
Core allocation. Fast, precise, and cost effective access to a broad variety of assets and sub-asset classes. Portfolio completion. Complete portfolio diversification by minimising benchmark risk with pure exposure to specific areas of the market such as factor or styles. Active and passive combinations. Combine index ETFs and low cost actively managed funds for diversification and the opportunity for outperformance.
Liquidity management. Invest short term in the market while refining a longer term investment view. Transition management. Quickly gain market exposure while searching for a new investment manager. Rebalancing. Manage portfolio risk or beta tilts in between rebalancing cycles. Tactical adjustments. Over or underweight certain asset classes, regions or countries. Overlay management (also known as liquidity sleeve). Use a portfolio of ETFs to provide similar exposure to the strategic asset allocation but with additional liquidity.
