The evolution of the ETF marketplace has created the tools to navigate central bank uncertainty and currency volatility. In our view, successful investors will be required to utilize all available ETF tools to build asset class and strategy diversification. ETFs allow managers to diversify beyond allocations to broad global equities and broad global fixed income. ETF managers now have the ability to allocate to sub-asset classes that can be segmented by sector or geography. Managers now have access to a variety of “factors” within asset classes, such as low volatility, momentum, high quality, and high dividends. There are excellent ETF tools that provide hedged or unhedged currency exposure within equities and fixed income.
The fact that ETFs are transparent, targeted, and traded make their use ideal within active, tactical strategies. This creates the opportunity for rotation across the sub-sectors of an asset class or even rotation out of an asset class. Given global central bank uncertainty, we favor tactical ETF strategies that attempt to adapt to changing market conditions rather than attempt to predict future market movements. As the power of central bank tools potentially diminish, investors may benefit from the rise of managers with the capacity to utilize the vast array of available ETF tools.