Rebalancing can help reduce the risk of giving too much weight to stocks whose price increases are not supported by improvements in underlying fundamentals. It can provide the opportunity to sell stocks that have become more expensive relative to their underlying fundamentals and buy stocks that have become less expensive relative to their underlying fundamentals. (Please note that stocks are affected by how the market performs. When stock prices fall, you should expect the value of your investment to fall as well.) Put simply, rebalancing to relative value allows us to effectively lower the prices of the markets we invest in*—helping us to:
• Avoid paying too much for growth
• Reduce valuation risk
• Provide the potential for outperformance
So, why don’t more ETFs rebalance to relative value—or even rebalance at all? Your guess is as good as ours.
See the difference rebalancing makes for yourself.
*Ordinary brokerage commissions may apply.