Exchange traded funds (ETFs) offer many benefits to investors, including intraday trading flexibility, liquidity, tax efficiency and potentially lower costof ownership.
While these features may all be attractive to investors, the ease of use and speed of execution of ETFs make them an ideal tool for rebalancing purposes. These two factors enable a reduction in slippage when rebalancing the portfolio.
Additionally, intraday liquidity enables ETFs to make the process of rebalancing quicker and more efficient than moving assets from illiquid managers. While ETFs provide the flexibility to get into or out of a position at any time throughout the day, managed funds on the other hand trade only once per day.
A Liquidity Sleeve
Some investors use ETFs as a ‘liquidity sleeve’, allocating a small portion of their overall portfolio to a liquid and easily tradable ETF (or ETFs), often mirroring their overall asset allocation. The ETF is then used as a liquidity source to facilitate rebalancing, in addition to facilitating tactical asset allocation and helping with efficient management of ongoing cash flows.