ETFs offer many ways to benefit from the broad landscape of investment markets and can be used to create a diversified portfolio. Your approach depends on what you want to achieve: investing for growth or for income; diversifying an existing portfolio; or investing through different risk profiles. The simple and flexible nature of ETFs means they can play a central role in any investment portfolio. In consultation with your investment adviser you can adopt a number of strategies using ETFs to get market exposure very quickly and easily to express your views and meet your investing objectives.
Selecting A Profile To Express Your Objectives
In order to help investors determine the outcomes that might reflect their investing profile, many investors consult with financial advisors. They would typically be allocated a risk tolerance based upon many factors such as age, income, investable assets and knowledge of investments. The following risk spectrum is commonly utilised in this process.
ETFs provide simple, easy and cost-effective ways to invest the core of a portfolio. There are many ways to put a group of ETFs together for the purpose of constructing a diversified portfolio.
Core/Satellite Portfolio Construction
Core/satellite portfolio construction aims to combine the most effective characteristics of index and alpha-generating strategies offering flexibility and lower costs than more conventional approaches. The broad range of market exposures offered by Exchange Traded Funds (ETFs) allows for a significant role in the implementation of core/satellite strategies, used both as efficient core investments as well as satellites.
Core/satellite investing is based on the simple concept of splitting a portfolio into two segments.
The first is the core (see Figure below). This forms the foundation of the strategy around which the more specialised satellite investments can be added. The core investments account for the main part of the overall portfolio, a typical allocation to the core investments would be 70%.
The core usually takes the form of a low risk, pooled investment vehicle. This is typically an index tracking fund, such as an ETF, that offers low cost, broadly diversified exposure to a market or index. The aim is to deliver a return in line with the market’s performance – this is often referred to as the beta return.
The second segment of the portfolio is made up of the satellites. These are typically more specialised investments which the portfolio manager believes will deliver additional returns (alpha). This can be achieved through exposure to specific markets, actively managed funds, investment themes, individual securities and ETFs. Satellite investments typically carry higher risk and fees than core investments.
The rise of exchange traded funds (ETFs) has made it easy to gain market exposure. Meanwhile, actively managed strategies are evolving to deliver higher value outcomes for investors. Blending these approaches can improve your portfolio and help solve real-life investment challenges.