While the expansion of the $3 trillion ETF industry continues to attract attention for the sheer size and popularity of this investment vehicle, there is yet another reason to favor ETFs—one that’s near to my heart as an economist and investment manager.
ETFs allow you think and invest like an economist, and not a stock picker. Rather than chasing after the hottest “name” or the latest “tip,” investors can develop an investment rationale and pursue their goals accordingly using ETFs.
I am on record as saying that the ETF is the greatest financial product innovation since the creation of the put option. With the put option, it suddenly became far easier (without the complexities of creating a synthetic position) and less risky to establish a short position by buying one instrument.
ETFs are just as revolutionary and for many of the same reasons. Through ETFs, investors have the ease and flexibility of establishing long and short positions by buying an instrument. And, ETFs provide the added benefits of low cost, transparency, all-day access (they trade like stocks), and vast exposure, including to asset classes that until recently were off limits to the average investor.
A Fundamentally-Driven Approach
At our firm, we use a fundamentally driven, macroeconomics-based approach to asset allocation. In simplest terms, when the economy is growing (as determined by our proprietary Astor Economic Index®) we believe it is an opportune time to hold risk assets (i.e. equities). Conversely, when the economy is contracting, we believe it is best to reduce equity exposure, increase fixed income holdings, and/or hold inverse equity positions. And all of these objectives—long equities, short equities, fixed income, as well as exposure to international and industry sectors from transportation to biotech—can be accomplished by buying ETFs.