By Kostya Etus, CFA – Portfolio Manager at CLS Investments, LLC
We all know and love ETFs. They mark an evolution in financial markets and a revolution in investment management. There are countless commonly known potential benefits, such as tax advantages, transparency, and low cost. But ETFs have important, yet less known advantages. For example, ETFs provide a tool for most jobs. The current lineup of 2,182 ETFs offers a range of strategies to reach a variety of investing goals for a variety of investors. Let’s explore a few ways ETFs could be used by investors.
A buy-and-holder is a passive investor who buys securities and holds them for a long period of time, regardless of market movements. Buying the S&P 500 Index and an aggregate bond index can be a viable strategy over the long run, and there are plenty of ultra-low-cost options for that in ETF land with 169 ETFs having an expense ratio of 0.10% or less. But research has shown it may be wiser to invest in factors that help explain long-term historic returns, such as value, momentum, and size. In comes smart or strategic beta strategies. There are now 705 strategic beta ETFs to choose from. But let’s not forget active management, which can serve well in complex asset classes. There are currently 224 actively managed ETFs.
An asset allocator balances risk and reward by allocating to assets based on individual risk tolerance. An important part to asset allocation is having a wide variety of asset classes to invest in. Asset classes typically have unique characteristics, and combining them improves diversification. There are 100 different Morningstar categories grouping ETFs. That’s a lot of diversification and a dream for an asset allocator. For those who want to outsource, there are currently 43 asset allocation ETFs.
A tactician may drastically shift an allocation based on market pricing changes. ETFs are ideal for the tactical investor as they are able to be traded throughout the day, allowing for intraday shifts in allocation. In addition, there are 26 minimum-volatility-related products that can be used to reallocate to in times of market stress without going straight to bonds or cash. Lastly, there are currently five ETFs classified as tactical allocation and 24 with “tactical” in the name, in case an investor wants to let someone else watch the markets.
A rotationist investor will allocate to the most favorable securities in a group of investments, such as sectors, factors, or countries. A rotation strategy works better when there is a wider dispersion of returns within the universe, and dispersion increases with a variety of options to choose from. There are currently 363 equity sector ETFs representing the 11 Global Industry Classification Standard (GICS) sectors, as well as many industries on a global scale. Within 494 international ETFs, 46 individual countries are represented by at least one ETF. Factor rotation is the newest wave with 161 ETFs having exposure to a single factor.
A speculator makes large, short-term trades to take advantage of pricing inefficiencies in an effort to capture above-average profits. As mentioned, one of the great benefits of ETFs is the ability to trade throughout the day, so investors can quickly move in and out of positions to take advantage of any short-term price movements. ETFs also offer many of the speculated asset classes with 180 commodity and 35 currency ETFs. Speculators can take advantage of more traditional asset classes but with a bit more juice through levered ETFs (some up to 4x levered!), of which there are a whopping 231 options.
A hedger looks for a reduction in, or protection from, unwanted risk. There are currently 126 inverse ETFs for investors to choose from. Just about anything can be shorted — from the broad market to commodities, sectors, currencies, and even Treasuries. Additionally, there is a slew of ETFs representing hedge fund strategies, including 23 long/short, nine market-neutral, nine options-based, six multi-alternative, four managed-futures, and two hedge-fund-replication strategies.
So, regardless of what type of investor you are, if you are looking for a specific type of investment exposure, chances are — there’s an ETF for that!
|ETF Category||Number of ETFs|
|Expense 0.10% or Less||169|
|Hedge Fund Replication||2|