Beyond the cost and operational efficiencies, ETFs could be the most versatile investment tool ever invented. Their inherent flexibility continues to fuel institutional and private demand. As a result, over the last few years, they have experienced one of the highest growth rates of any investment product. You can easily invest across national and international markets, access sectors such as energy, finance, and raw materials, and take advantage of performance opportunities offered by trusts that pay interest and dividends. Regardless of an investor’s needs, the family of iShares ETFs can help them achieve their goals.
Whether it is a question of improving a current investment or exploring new opportunities, one or more of these basic investment strategies will help ETFs work for you.
Not all portfolios are diversified the same way. The idea behind portfolio perfection strategies is to ensure that the portfolio is well diversified. Contrary to popular belief, a perfected portfolio goes beyond including a variety of equity securities, bonds, and mutual funds. Rather, it is characterized by the correlation between one asset class and another, the accuracy of the vehicles used to represent those asset classes and how each of them are allocated.
Offsets in a portfolio: Whether in styles or asset classes, they may occur as a result of different circumstances. For example:
- Random accumulation: Over time, it is possible to accumulate a random selection of equity securities, funds, or managers regardless of how they relate to each other. In fact, if the holdings are highly correlated to each other, it is possible that they may in fact be working against each other.
- Portfolio concentration: If you have invested in one or two asset classes or sectors, you can easily diversify with the iShares ETFs family.
A well-diversified and perfected portfolio will give you a better position to maximize your asset allocation plan and thus manage the risk and reduce the volatility of the investment. Diversification ensures that performance depends not only on one holding, or even a small group of investments.
This is a robust methodology for achieving an optimal reference and performance.
As an experienced investor, you've probably asked yourself some tough questions: Is my portfolio diversified enough? How much risk am I actually assuming? How long should I keep a security or fund that is having a bad year? You are not alone in asking these questions. These are questions that large institutional investors have been asking for years. Many of these organizations have found the answers through a powerful portfolio creation methodology known as primary/secondary, a strategy that is gaining popularity among a growing number of investors.
The primary/secondary strategy is an excellent way to combine indexed and active management strategies. You can combine iShares ETFs (as the "primary" strategy) with complementary investment companies, specific stocks, or separately managed accounts (as the "secondary strategy). The indexed or primary component seeks to match the benchmark index's performance. This is a useful strategy for minimizing the risk of lagging behind the market, while the actively managed secondary stocks seek to achieve higher performance.
Why use ETFs in primary/secondary strategies?
• Portfolio risk transparency
Compared with a portfolio of actively managed funds and individual stocks, a primary/secondary strategy can provide a more comfortable level of risk by diversifying the principal across different asset classes.
• Cost transparency
As ETFs do not require ongoing management, as do most actively managed investment companies, ETFs have lower management fees or management cost percentages, so higher yields are achieved by devoting fewer resources to the related expenses.
• Investment transparency
ETFs provide an aspect that is not often considered in primary/secondary portfolios: investment transparency. ETFs are completely transparent, as each ETF is designed to track an established index set, and the stocks that make up these indices only charge occasionally.
• Focus on efficacy
ETFs used in a primary/secondary strategy provide a strategic approach. It is difficult to predict which equity securities, funds, and managers will have the best performance, especially after deducting the costs, so by using ETFs as your principal investment strategy, you will obtain logical investment solutions established by tracking an index. Management resources can thus be focused on complementing the portfolios with secondary strategies that can achieve better long-term performance.
There are two key considerations when carrying out a primary/secondary strategy: for the primary strategy, the performance of the asset class is the most important factor, while for the secondary strategy, the manager's ability and the individual risk of the securities/bonds are the critical factors.
Management of the total portfolio risk management when incorporating iShares ETFs. iShares ETFs can be used as 100% of an indexed solution or they can be combined with actively managed portfolios, with separate funds or accounts, to control the investment's overall volatility.
Let us consider market capitalization in order to have a closer look at how this principle works. Instead of selecting a single-mid-cap security in which to invest, you can diversify your portfolio and spread risk throughout that asset's entire class by buying iShares Russell 2000 Index Fund (IJH).
- Reducing exposure to active risk through the inherent transparency of iShares ETFs
Using iShares ETFs, you can control the active risk associated with investment companies, as well as the possibility of a large tracking error. By investing in iShares ETFs, you know exactly what you are investing in, as they replicate the underlying index and their components are released each trading day. Traditional investment companies, on the other hand, reveal their total holdings less frequently. Only when you can really see the comparison of the ETF's portfolio do you have the ability to assess how close the fund manager is to achieving the ETF's goals and style.
- Reducing risk concentration and portfolio diversification
You can diversify, avoiding investing in a single security or asset class, without having to concentrate on a specific sector and incorporating an appropriate iShares ETF to the portfolio. For example, let us consider a small-cap fund. Instead of studying all the individual small-cap companies in the world, you can express your preferences by purchasing a small-cap ETf.