ETFs enable a diverse investment strategy. (KI Photo: freepik)
ETFs are suitable for investors who do not just want to rely on stocks, bonds or investment funds. They are a helpful way to strengthen your strategy and not just bet on individual companies.
ETFs can be passive as well as active
For investors, ETFs offer the opportunity to invest passively by attempting to mimic the market return. Or you can take an active approach to outperform the market. There are passive options and active options with ETFs. Both variants can be combined in a portfolio.
The passive approach could form the core of the portfolio, while active ETFs are supplemented to achieve specific objectives. The active approach allows investors to pursue personal goals that may not be achievable with a broad market index.
ETF categories: plenty of room for an active approach
Investors who want to focus on specific themes or exclude certain criteria without relying on individual stocks can achieve their goals using active ETF strategies. There are ETFs that are based on stocks or bonds. There are sector-based ETFs that allow you to be overweight in one or more sectors. Popular sectors include technology, healthcare and industrials.
Furthermore, ETFs can be clustered in different markets and regions of the world. There are international ETFs, but also regional or country-specific ETFs. Another differentiating factor is market capitalization. There are ETFs that focus exclusively on small-cap companies, mid-cap companies or large-cap companies. Further differentiations concern, among other things, the type of currency, fund size, costs and distribution.
The risk of trend and theme ETFs
Due to the rapidly changing world, some investors want to participate in future trends without putting all their eggs in one basket. Appropriate thematic ETFs were formed to meet these needs. For example, they address digital disruption, artificial intelligence, sustainability, demographic change or urbanization and infrastructure.
But topic ETFs don’t seem to be the ideal option for investors. It is precisely investors who tend to pay little attention to companies who turn to ETFs. In the case of topic ETFs, they are usually less able to look at the ETFs in detail. There are often companies in the top 10 that basically have little contact with the topic in question, but offer stability or price performance.
Everyone has to decide for themselves to what extent thematic ETFs are suitable in this case. But there is an added risk that thematic ETFs will be bought when they have already had their best period and a certain degree of overvaluation has occurred in this trend. As a result, it is not uncommon for the returns from these ETFs to be worse than a broadly diversified passive ETF.
How ETFs can now be integrated into the portfolio
All investments are a means to an end. They can help achieve financial goals. With a 3-step process, individual goals can be mapped accordingly.
Passive vs. Active Approach: The first thing to answer is whether the performance of the overall market is desired. Or whether to try to use active strategies to break through the passive nature of the general ETF investor in order to achieve a higher return than the overall market.
Determination of the asset mix: If the fundamental decision is made about active vs. passive or the ratio, the asset mix must be defined. This determines how the portfolio should be structured. How high should the individual shares be in ETFs and to what extent should individual ETFs be included in the portfolio? Should it be stock or bond ETFs?
These questions help to find the right balance between risk and return and to align the portfolio according to your personal goals.
Selection of ETFs: In the end, the ETFs that come closest to the criteria must be selected. Should it generate dividends? Or is the focus more on specific geographical regions or sectors? Investors can also decide here whether they want to invest countercyclically by betting on currently weak sectors, or whether they would rather focus on current trends with potentially higher risks.
Considering these and many other questions, it can be seen that ETFs do not have to be boring. They offer a variety of options for representing both broad market strategies and specialized thematic investments and preferences.
Depending on your goals and risk tolerance, ETFs can enable a similarly diverse investment strategy as individual stocks, but without the hassle of company-specific analysis and valuations.
Disclaimer:
Not investment advice. No call to buy or sell securities.