Savvy investors are discovering what institutional investors have known for some time, that asset allocation is an important driver of long term investment results. However, advanced asset allocation strategies have been difficult for many individual investors to implement, given the costs and investment size required to achieve more effective levels of diversification.
ETFs offer investors a sophisticated tool to efficiently gain exposure to broad market segments, encompassing a wide range of asset classes, equity market capitalisations and sectors.
ETFs enable investors to build customised investment portfolios consistent with their financial needs, risk tolerance and investment horizon. It’s important to remember that diversification and asset allocation do not ensure a profit or guarantee against loss. Three examples of asset allocation and ETFs include: strategic asset allocation, core-satellite strategies, and tactical asset allocation.
Sample Uses of ETFs in Asset Allocation Strategies: Strategic Asset Allocation: Research shows that strategic asset allocation is one of the most critical factors in explaining the difference in returns across portfolios.2 After investors decide what their long-term asset allocation will be—for example, equities vs. fixed income vs. commodities—they can then deploy SPDR ETFs, such as index fund ETFs, to build easily managed, low-cost portfolios that reflect the combined performance of the selected market indices.