Standard & Poor’s has cut the U.S. debt rating and global stocks are selling off, so does this mean investors should react by reshuffling the exchange traded fund allocations in their portfolios?
The change in the U.S. debt rating does not warrant a total change in portfolio composition. Rather, investors may want to consider what their risk appetite can handle and assess what safeguards they want to use for protection, such as setting a stop loss. [Summer Crash of 2011?]
“The downgrade of U.S. sovereign credit by S&P on Friday reflects facts that have been well known to the market for some time. So, it does not imply a fundamental increase in risk, and we don’t believe that investors should change their behavior based solely on the downgrade. However, in combination with continued economic weakness and regulatory uncertainty, this may provide a signal to some investors to reassess their risk appetite,” said ETF manager BlackRock in a recent media statement.
Some are worried that ETFs with small asset bases may be forced to shut down in a market downdraft, reports Reuters.
Most buy-and-hold investors are usually invested in broad-based, plain vanilla funds. Analysts do not recommend exiting these funds and trying the trade the market’s swings. Specialized leveraged and niche funds carry extra risk, according to the report. [10 Tips To Manage Risk with ETFs]
“Synthetic products like leveraged and inverse ETFs are not appropriate for buy-and-hold investors,” advised North American Securities Administrators Association, “because an ETF may reset each day and its performance may quickly deviate from the underlying index, currency or commodity basket its attempting to mirror.” [Have an ETF Investing Plan to Avoid Trading on Emotions.]
The recent market sell-off has stretched risk tolerances with many investors learning real losses are different from theoretical ones. Having a balanced ETF portfolio strategy with clearly-defined exit points in place before markets get volatile is key. [Have a Plan to Avoid Trading on Emotion]
Tisha Guerrero contributed to this article.