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In consultation with your investment adviser, you may adopt various strategies using ETFs, which are summarised below.
The core & satellite approach to portfolio construction is a method whereby the investor may use passive investments in the core of the portfolio with actively managed investments as satellites. Conversely, they may use actively managed investments in the core and passively managed investments as satellites.
ETFs can be used in portfolio construction as core holdings to improve portfolio diversification.
ETFs can be used to tilt a portfolio towards a preferred sector. For example, the investor has a large portfolio of directly held shares and wants to take advantage of an expected rise in commodity prices by buying more resource stocks. The investor already owns Rio Tinto (ASX code: RIO) but does not want to simply buy more and concentrate risk in one company. Like many investors, they do not have the time to research each company in the sector. The investor then buys a resources ETF, instantly gaining resources sector exposure with just one trade. As a result, the portfolio is tilted towards resources, added diversification and stock specific exposure is minimised. Pairs trading strategy can be added to further reduce or remove exposure to any specific stocks (see below).
ETFs can be used by investors to exploit sector opportunities throughout the market cycle. This portfolio strategy recognises that at each stage of the economic cycle, different industry sectors tend to outperform the market. The investor takes a macro approach, using ETFs. For example, when commodity prices are rising, the investor may buy a resources ETF (e.g. MVR or MVE); when growth slows, they may move into a high dividend-yield ETF (e.g. MVA or MVB).
An investor can go long an ETF and short some of the constituent securities that make up the ETF to reduce or remove exposure to specific underlying securities.
Given that ETFs are traded on the ASX, investors may be able to short ETFs on the condition that stock lending is available.
Find out more about VanEck Vectors ETFs.