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ETFs were originally conceived to help provide pricing transparency for institutional investors. But as the industry has exploded in size, so too have the ways that investors use these flexible funds to address critical portfolio needs. Investors of all types and sizes are employing diverse strategies to construct and manage portfolios using ETFs.
Broaden Asset Allocation
ETFs offer investors a sophisticated tool to gain exposure to broad and targeted market segments covering a wide range of asset classes, equity market capitalizations, styles and sectors. This enables investors to build or tailor customized investment portfolios consistent with their financial needs, risk tolerance and investment horizon.
Strategic Asset Allocation
Strategic asset allocation is a target allocation of asset classes you expect to have in place for a long period of time. The target allocation is expected to remain the same and the portfolio is rebalanced to the original allocations when they deviate significantly from the initial settings due to differing returns from the various assets. Strategic asset allocation looks more at the overall risk objective of the portfolio, and therefore takes a long-term view.
Whether you’re looking to cover the broad global equity market, the total bond market, or take positions in specific countries, commodities or real estate, there’s likely an ETF—or ETFs—to help meet your objectives.
Tactical Asset Allocation
Tactical asset allocation is a short to intermediate-term view that looks for investment opportunities in the market. It allows investors to make real-time adjustments to their long-term asset allocation to take advantage of short-term tactical opportunities.
Tactical adjustments might include increasing allocations to markets and sectors that have become more attractive, or decreasing exposures to less attractive ones. Investors can also easily reverse these tactical moves once the opportunities and risks have run their course.
ETFs are an efficient tactical asset allocation tool as they offer intraday trading at typically lower costs.
A core-satellite strategy seeks to replicate the broad market return in the “core” portion of a portfolio, and uses a “satellite” strategy to find alpha opportunities and add diversification using non-core market exposures.
Broad, market-based ETFs can be used as the core of an investment strategy. Sector, commodity-based, or other smart beta or active ETFs can be used to add a cost-effective satellite strategy to a portfolio to complement the 'core'. This approach allows an investor to customize their exposure and risk to potentially enhance returns.
Access Hard-to-Reach Markets
ETFs have democratized investing, giving individual investors the same access to investment solutions as institutional investors—at the same price.
The ETF wrapper has opened up new doors to:
And many more
ETFs offer expanded market exposures in a convenient, portable investment instrument.
There are a number of portfolio management options using ETFs:
Given their inherent benefits, ETFs are a helpful tool for rebalancing portfolios and keeping them on track to meet long-term strategic asset allocation targets.
ETFs can easily be used to refine portfolio strategy and adjust holdings in response to shifting market conditions or an investor's changing needs.
Year end can be an apt opportunity to rebalance portfolios while taking advantage of possible unrealized losses.
The broad array of ETFs available today creates risk management approaches for individuals and smaller institutions that only large institutional investors could access previously.
The smaller denominations in which ETFs trade relative to most derivative contracts provide an accurate risk exposure match for portfolios of any size.
In the US, ETFs can be sold short, providing greater trading flexibility.
Sector ETFs can also be a useful tool for investors who hold a significant number of stock options, allowing them to hedge the exposure to the companies they own by effectively diversifying their risk exposure across the broader equity market.
ETFs can be easily employed to help investors minimize their tax consequences. ETFs are inherently tax efficient vehicles and can be used to harvest tax losses while potentially avoiding the impact of wash-sale rules.
When investors change asset managers, they’re often concerned with how to preserve equity exposure during the transition. One way to achieve this goal is to liquidate the portfolio and then reinvest the assets in an ETF with a high correlation to the benchmark of the active manager. Once a new manager is chosen, the investment professional can sell the ETF shares to fund the purchase of this exposure.
The S&P 500 Index is an unmanaged index of 500 common stocks that is generally considered representative of the US stock market. The index is heavily weighted towards stocks with large market capitalizations and represents approximately two-thirds of the total market value of all domestic common stocks. The S&P 500 Index figures do not reflect any fees.
Sold Short or to Sell Short
Selling a security that is not owned by the seller, or that the seller has borrowed.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
Distributor: State Street Global Advisors Funds Distributors, LLC, member FINRA, SIPC, an indirect wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. Certain State Street affiliates provide services and receive fees from the SPDR ETFs. ALPS Distributors, Inc., member FINRA, is the distributor for DIA, MDY and SPY, all unit investment trusts. ALPS Portfolio Solutions Distributor, Inc., member FINRA, is the distributor for Select Sector SPDRs. ALPS Distributors, Inc. and ALPS Portfolio Solutions Distributor, Inc. are not affiliated with State Street Global Advisors Funds Distributors, LLC.
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