ETFs can be used to implement a variety of short- and long-term portfolio strategies.
Some of the uses for ETFs are strategic—for example, asset allocation—while others are tactical. Whether it makes sense to use ETFs in a particular strategy depends on a number of factors, including the dollar amount invested, holding period, trading costs, appetite for risk and more.
Here are some of the most common ways investors put ETFs to work in their portfolios:
1. Core allocation
Gain fast, precise, and cost-effective access to a broad variety of assets and sub-asset classes to build a strategic core allocation.
2. Portfolio completion
Complete portfolio diversification by minimizing benchmark risk with pure exposure to specific areas of the market such as factor or styles.
3. Active and passive combinations
Combine index ETFs and low-cost actively managed funds for diversification and the opportunity for outperformance.
4. Liquidity management
Invest short term in the market while refining a longer-term investment view.
5. Transition management
Quickly gain market exposure while searching for a new investment manager.
6. Rebalancing
Manage portfolio risk/beta tilts in between rebalancing cycles.
7. Tactical adjustments
Over- or underweight certain asset classes, regions, and/or countries.
8. Overlay management (sometimes known as liquidity sleeve)
Use a portfolio of ETFs to provide similar exposure to the strategic asset allocation but with additional liquidity.