And the combination of ETFs and select active funds may allow for improved risk/return profiles, and outcomes. For example, in the bond portion of a portfolio with a large fixed income allocation, it’s possible to pursue better income opportunities while also managing the portfolio’s sensitivity to interest-rate movements or other bond risks using an actively managed, unconstrained bond fund. However, by combining that fund with a traditional index exposure like the iShares Core U.S. Aggregate Bond ETF (AGG) we limit the total amount of active risk in fixed income. And in the equity portion of the portfolio, we find a place for efficient equity index exposure, such as that provided by the iShares Core S&P Total U.S. Stock Market ETF (ITOT), to work alongside an unconstrained, global long-short equity strategy;, which is a more effective way for an active manager to implement insights and thereby display skill than a long-only strategy.
These are just some of the ways that investors can combine active and indexed solutions to seek better outcomes and pursue their goals. Talk to your advisor about whether this makes sense for your portfolio. We also note here that such investing in a sense puts to rest the active/passive debate, because deciding whether and how to allocate between actively managed funds and index exposures is of course an inherently “active” process.
Source: Bloomberg, BlackRock.
Michael Gates, CFA, leads a team responsible for the development and management of a range of BlackRock model portfolios. He contributed to this article.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog and you can find more of his posts here.