Investment Ideas


Rebalancing

Periodic portfolio rebalancing is an essential element of high quality institutional portfolio management.

Portfolio composition can deviate from the strategic asset allocation (SAA) over time as a result of market developments. Rebalancing back to the SAA maintains the portfolio’s desired long term, optimal exposure to systematic risk.

Investors should seek to find the most efficient trading strategy to rebalance their asset allocation.

 


Assets

$678B

Global ETF assets under management 1


Experience

1993

Launched the first US-listed ETF


Products

252

Global number of ETF offerings 2


Uses of ETFs: Rebalancing


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.

 

Investors Increasingly Use ETFs for Rebalancing

The valuable characteristics of ETFs have enabled institutions to employ them in a growing number of portfolio functions, ranging from short term and tactical, to long term and strategic.

Between October and December 2018, a new US ETFs survey from Greenwich Associates canvassed 181 institutional investors, including 37 institutional funds, 33 insurance companies/insurance company asset managers, 56 registered investment advisors and 11 investment consultants. The study highlights that 60% of investors cite rebalancing as a primary application for ETFs3, up from 53% of participants in the previous year.


Rebalancing With SPDR ETFs


We launched the industry’s first US-listed ETF in 1993 as a cash equitisation vehicle for institutional investors. Since then, institutions remain some of the largest investors in ETFs, with usage continuing to expand across a wider range of investors and investment strategies.

ETFs offer investors further benefits – they are low cost, simple, tax efficient and easy-to-access investments.


Insights


SPDR Bond Compass - Quarterly Report

Understanding ETF Liquidity

One of the main advantages of ETFs is that they offer liquidity from two sources. From the surface, it may be obvious that there is liquidity as defined by the trading volume and bid/ask spread in the secondary market. Beneath this is another source of liquidity in the primary market that may often be missed. 

Related Insights


More information

1Source: Morningstar, as of March 31, 2019.

2Source: Morningstar, as of March 31, 2019.

3Source: ETFs: U.S. Institutions’ New Tool of Choice for Portfolio Construction, Greenwich Associates, Q1 2019