1. Exchange-Traded Funds: Introduction
  2. Exchange-Traded Funds: Background
  3. Exchange-Traded Funds: Features
  4. Exchange-Traded Funds: SPDR S&P 500 ETF
  5. Exchange-Traded Funds: Active Vs. Passive Investing
  6. Exchange-Traded Funds: Index Funds Vs. ETFs
  7. Exchange-Traded Funds: Equity ETFs
  8. Exchange-Traded Funds: Fixed-Income and Asset-Allocation ETFs
  9. Exchange-Traded Funds: ETF Alternative Investments
  10. Exchange-Traded Funds: ETF Investment Strategies
  11. Exchange-Traded Funds: Conclusion

ETFs provide considerable flexibility in implementing various investment strategies or building investment portfolios. Strategies range from very simple, such as diversifying an existing portfolio, to sophisticated hedging strategies.

Core Holding
An investor can consider using a few ETFs as core portfolio holdings. A low-cost diversified portfolio can easily be constructed with a few ETFs to cover the major equity asset classes and the fixed-income market. From that starting point, the investor can customize a portfolio with additional securities, mutual funds or other ETFs. (To learn more, read 10 Reasons To Make ETFs The Core Of Your Portfolio.)

Asset Allocation
With ETFs, building a portfolio for any asset allocation strategy is easy. It is even possible to buy an ETF that is already diversified across different asset classes.

An investor can take a passive approach to asset allocation by rebalancing the portfolio only to ensure it returns back to the long-term or strategic asset mix. Alternatively, the investor can take an active role in asset allocation, by tactically rebalancing the portfolio, overweighting those asset classes that are expected to outperform in the shorter term and underweighting the others. (For more on strategies, read Asset Allocation Strategies.)

Diversification
ETFs allow the investor not only to diversify across all the major asset classes, such as U.S. equity , foreign equity and fixed income, but also to diversify into investments that have a low correlation to the major asset classes. This includes areas like commodities, real estate, emerging markets, small cap stocks, and others. (For more insight, read Introduction To Diversification.)

Hedging
The use of ETFs allows for a variety of hedging strategies. Investors who want to hedge against a drop in the market can purchase inverse ETFs or leveraged inverse ETFs, which rise when the market falls. An investor concerned about inflation can hedge it by investing in commodities or inflation-protected bond ETFs. Investors that have investments out side the U.S. can hedge their foreign currency exposure with currency ETFs. Of course, investors can short an appropriate ETF that can hedge against a very specific stock market exposure. Many ETFs have options that can be used for other hedging strategies, either separately or in conjunction with the underlying ETF. (To learn more, check out A Beginner's Guide To Hedging.)

Cash Management
ETFs can be used to "equitize" cash, allowing investors an easy way to put their money in the stock market until a long-term investment decision is made. In this way, investors can ensure they do not miss out on price rises or forego income while their money is parked temporarily.

Tax-Loss Harvesting
Tax-loss harvesting is a strategy of realizing capital losses in a taxable account, and then redeploying the sale proceeds among similar investments, leaving the investor's portfolio largely unchanged. The wash-sale rule prevents an investor from selling a security at a loss and then immediately repurchasing it by disallowing the purchase of "substantially identical" securities within 30 days of a sale. With the availability of a wide variety of ETFs, buying an ETF that is very similar to the fund or stock being sold is easy. The end result is a portfolio that closely resembles the one before the capital losses were realized without invoking the wash-sale rule. (For more on this strategy, see Selling Losing Securities For A Tax Advantage.)

Completion Strategies
An investor might want to quickly gain exposure to specific sectors, styles or asset classes without having to obtain the prerequisite expertise in these areas. As an example, an investor who has no expertise in emerging markets can buy an ETF based on an emerging market index. Using ETFs allows an investor to easily fill the "holes" in his or her portfolio.

Portfolio Transitions
Many investors move portfolio assets between different advisors, managers or funds. In the transition period, the assets might be allowed to sit idle in cash. ETFs allow investors to keep their assets invested rather than having them dormant.

Exchange-Traded Funds: Conclusion

Related Articles
  1. Investing

    The Main Attractions of ETF Investing (SPY)

    As the popularity of ETFs soar, a look at the main benefits of these investment vehicles.
  2. Investing

    5 Reasons to Pick ETFs Over Mutual Funds

    Discover five reasons why average investors and sophisticated hedge funds choose ETFs instead of mutual funds to meet their investment goals.
  3. Financial Advisor

    How to Invest Your Excess Cash in Commodities ETFs

    Discover how commodity-based ETF investments can help diversify your investment portfolio.
  4. Investing

    The Advantages of ETFs Compared to Index Funds

    With the ongoing ETF boom, ETFs gain more variety and increased competition in the market leads to further investors' advantages compared to index funds.
  5. Investing

    Exchange-Traded Funds (ETFs)

    This vehicle combines the diversification of a mutual fund with the flexibility of a stock. Learn more about them here.
  6. Investing

    4 Ways to Evaluate ETFs Before Buying

    Learn four areas in which to evaluate an ETF investment to be sure that the investor has a clear understanding of the security being purchased.
  7. Financial Advisor

    How To Pump Up Your Portfolio With ETFs

    These funds trade like stocks, provide diversification, reduce risk and increase returns.
  8. Investing

    Inverse ETFs Can Lift A Falling Portfolio

    These funds can reduce your exposure to market risk or enhance portfolio performance.
  9. Investing

    5 Reasons Why ETFs Work For Young Investors

    ETFs contain all of the characteristics that make them the perfect investment opportunity for young investors.
Frequently Asked Questions
  1. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  2. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
  4. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ...
Trading Center