Tactical management offers more than simply the ability to protect. Importantly, tactical management strategies may offer the potential for growth and outperformance relative to market benchmarks. Tactical can play the role of portfolio growth engine by utilizing strategies that overweight or emphasize securities, sectors, or asset classes. Too often, tactical is viewed simply as a tool used to identify what to avoid or when to sell. Tactical can also be useful in identifying what should be owned and when to buy. Strategies that only focus on “exiting” the market are not sustainable, as investors will ultimately desire to re-enter markets. Tactical can be important in the persistent investment search for growth opportunities.
It is worth noting that Exchange Traded Funds (ETFs) have transformed the ability to create and implement tactical strategies. ETFs have opened up access to asset classes and sub-asset classes (diversified market “beta”) that were previously the domain of only the largest institutional investors. ETFs provide transparent, targeted access to a wide variety of markets, segments, sectors, and factors.
ETFs create efficient, cost-effective market exposure that allows value creation through the tactical management of diverse market betas. In the past, the primary focus of many investors was individual stock selection (Should I own Chevron or Exxon?). At Lunt Capital, we do not focus on differences between individual companies within the same sector that often exhibit high degrees of correlation. Instead, we focus on creating value by targeting specific sectors, segments, asset classes or factors (Should I own energy companies or technology companies? Should I own U.S. stocks or Emerging Market stocks? Should I own stocks exhibiting lower volatility or stocks exhibiting momentum?). It would be difficult or impossible to tactically answer these questions without ETFs.
Tactical strategies are a valuable investment tool that can be utilized for protection or growth within portfolios. ETFs have opened access to tactical strategies to all types of investors. Tactical ETF strategies have transformed investing—this is an important tool that cannot be ignored.