Investment Strategies

Using ETFs in investment strategies

ETFs can play a key role in portfolio strategies ranging from the simple to the complex.

Their building block nature means they can either be used alone, or in conjunction with other types of investment product or individual securities, to build diversified portfolios.

ETFs can help make your cash work harder for you.

ETFs can be a cost-efficient way of putting idle cash to work in the financial markets, during periods when you are looking to rethink your longer-term investment strategy.

ETFs can also be used to fill gaps in your portfolio or to add diversification to existing portfolios as required.

Sector-based ETFs offer a quick and cost-efficient way of implementing tactical strategies such as sector rotation (switching between sectors as market conditions dictate). After researching market conditions, investors can use ETFs to increase or decrease exposure to chosen sectors. ETFs can also be used to seek relative outperformance from among asset classes, styles or sectors. On the fixed income side, ETFs can be used to increase or reduce duration (interest rate risk) and credit risk among bond portfolios in anticipation of future interest rate movements.

ETFs also offer a cost-efficient way of gaining access to hard-to-reach markets (such as emerging markets).

ETFs can form the centrepiece of your investment strategy.

During times of rapid economic and market changes, where the value of traditional portfolios of stocks and bonds can vary wildly, the simple and flexible nature of ETFs means they can now play a more central role in investment portfolios.

A popular investment strategy is known as Core/Satellite, where the core, or centrepiece of the strategy is a low risk fund such as an ETF, which offers low-cost and diversified exposure to an index. The aim of the core is to deliver returns in line with the market’s performance (known in financial markets as beta).

Then, there are satellites – typically more specialised investments designed to generate additional returns (known in financial markets as alpha).

Satellites can be either specialist ETFs, actively-managed funds, hedge funds or direct investment in specific securities.

Risks: Keep in mind that the value of an investment may go up or go down. Check in the prospectus for specific risks and tax implications. For example, investing in an ETF with an international focus might expose you to currency risk.

The ‘building block’ nature of ETFs makes them a perfect fit for Core/Satellite investments, as positions can be increased or reduced quickly and cost-effectively.

This is not intended to provide specific investment advice including, without limitation, investment, financial, legal, accounting or tax advice, or to make any recommendations about the suitability of iShares® for the circumstances of any particular investor. If you do require investment advice, please contact your broker or financial adviser. You should take appropriate advice as to any securities, taxation or other legislation affecting you personally prior to investing.