What portfolio strategies exist for using ETFs?

 

ETFs can be effective tools for implementing a variety of short- and long-term portfolio strategies. This section provides practical ETF allocation insights and solutions for a variety of strategic and tactical strategies.

Asset allocation

As you know, asset allocation is the primary factor in determining a portfolio's risk and return. Broadly diversified ETFs and mutual funds are tools that can help you construct effective asset allocations for your clients. In fact, using the four core broad-market ETFs shown at right, you can provide clients with cost-effective diversification across all the major asset classes.

Over time market forces cause nearly every asset allocation to change, resulting in a change to the portfolio's risk and return characteristics. That's why periodic rebalancing is an integral part of your job as a financial advisor. Given ETFs' trading flexibility and ease of access, they are particularly good tools to use when rebalancing a client's portfolio to its strategic asset allocation.

 

Sub-asset allocation

A portfolio's weighting in an asset class often reflects the weighting in the broad market. However, for some clients, adjusting the concentration in a security, industry sector, market segment, or asset class to a desired tilt can be a practical solution to meeting their unique investment objectives.

The example below shows how a specialized equity ETF can enable you to achieve the desired tilt when implementing a sub-asset allocation strategy for your clients.

ETFs also let you implement fixed income sub-asset allocation strategies, including duration strategies or sector tilts. For example, the investment allocation grids below show how to implement a government overweight strategy. Of course, you can create a wide variety of sub-asset allocations to meet individual client needs. See the Vanguard ETF® portfolio strategies guide below for more examples.

All investing is subject to risk, including possible loss of principal.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.

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