There are a number of options available to investors when implementing a transition, including futures and swaps. However, swaps can introduce counterparty risk, and there are limited futures contracts to choose from outside of major benchmarks - as a result, managers seeking exposure to non-major benchmarks need to use alternative instruments. Similarly, almost all futures contracts are single-country exposures, so a global or regional exposure requires investing in a combination of a number of futures contracts in different geographies, time zones and exchanges.
Exchange traded funds (ETFs) can offer broad exposure or targeted exposure, making it an attractive and useful tool for investors looking to implement a range of investment strategies such as transition management. For example, to reduce the risk of opportunity cost, ETFs can offer investors interim exposure to a targeted segment of the market, rather than having an allocation to cash. This is known as cash equitisation – a strategy which aims to stay invested with minimal risk instead of carrying cash, reducing the likelihood of performance shortfalls.