Advanced strategies

There are many ways ETFs can work within your overall investment strategy. Here we look at some ways how ETFs can work in your portfolio.

Core-satellite investing

There are many ways to create a portfolio, and a core – satellite strategy is one way to go.

With a core-satellite investing strategy an investor will build a portfolio that focuses on having a ‘core’ set of investments – these are usually long term and well diversified holdings that need minimum ongoing management. These are then coupled with ‘satellite’ holdings which are generally more actively managed.

This strategy can allow investors to take some measured risks with their investments by giving them the flexibility to try out different investment strategies and approaches without taking too much risk overall.

But like all investing strategies, it’s important you do your own research. Every investor is different and will have a different risk appetite, but a general rule of thumb is that your core holdings could account for a higher proportion of your portfolio, with satellites making up the remainder.

The Core

The core is, as the name suggests, the core pillar of your portfolio so it’s important you take the time to ensure it’s set up properly. Here are some core fundamentals that should be kept in mind:

  • Look for diversification across companies, sectors, regions and countries. ETFs can give you exposure across all these measures, but if you want to build out your own portfolio make sure you take into consideration the measures above.
  • Consider the cost. Be sure to factor in all costs including brokerage and fund management costs (where relevant).

The Satellite

Satellites can be more active short-medium term investments that you’re willing to take a bit more risk for. So if there’s a particular single stock you’re looking to invest in, adding it as a satellite component to your portfolio could be a great way to gain exposure.

Thematic investing: The Great Acceleration 

Growing appetite for thematic investing comes from the need to identify future drivers of return (such as technological breakthroughs) from equity investments, which gives them the potential to outperform traditional broad indexes reflecting the movement of the entire market.

Identifying the potential for structural change and investing in expected transformations early (such as the rise of the internet in the 90s) is a key driver of successful investing. This is particularly important for long-term investors to ensure that their portfolios are positioned for growth opportunities.

In the enclosed whitepaper iShares by BlackRock discusses growth opportunities for investors in the market such as:

  1. Industrial renaissance (electric vehicles, supply chains etc)
  2. Medical breakthroughs (vaccines, immunology, neuroscience); and
  3. Consumers and spending habits (growth of emerging markets, future of food).

How ETFs can offer protection in down markets

The market turmoil in 2020 saw a massive increase in trading volumes in ‘short’ equity funds. Average daily trading volumes in ASX listed ETFs that provide short exposure to the Australian and U.S. markets were ten times higher than average daily trading volumes in 2019.

In the paper below we look at how these funds work, their risks and benefits, and how they differ from other products or strategies that offer short exposure.

Learn more about ETFs

Learn more about ETFs and how they compare to other investments. 
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