The exchange traded fund business is seeing activity rise due in part to the growth of tactical investing as more individuals move away from buy-and-hold strategies, according to a recent report.
With market volatility and correlations rising, investors have been seeking out alternative ETFs to freely move around the markets and reduce risk, taking away business from what once was exclusively the domain of actively managed funds, according to a Strategic Insight report.
Strategic Insight reveals that less investors and advisors are loath to stick with the “buy-and-hold” mantra as more are adding tactical strategies that require greater attention and more frequent rebalancing, reports Chriss Flood for Financial Times.
“Many investors use ETFs in ‘tactical’ ways. Either to express short-term views on segments of the market, or for tax-loss harvesting, transition management or cash equitization purposes,” Loren Fox, a senior research analyst at Strategic Insight, said in the FT article.
Additionally, the firm pointed out that ETFs are increasingly being used as low-cost beta, or volatility, solutions in core and satellite holdings. Investors are also seeking to generate greater alpha, or excess returns, through a mixture of beta exposure through long-short, sector-rotation and other ETF strategies.
“In this way, the proliferation of ETFs challenges the traditional alpha/beta and active/passive demarcations,” Fox added.
ETF providers are moving beyond the plain vanilla, passive indexing strategies that mimics many well-known indices to creating ETFs around hand-tailored indices that provide similar strategies as active portfolio managers. These types of new ETFs now make up 16.2% of total U.S.-listed ETF assets, compared to 4.2% at the end of 2006. [Index ETFs with Active Strategies]
Strategic Insights projects U.S.listed ETFs will add on $100 billion in net new inflows for 2011, with 20% to 25% coming from redemptions out of mutual funds.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.