In consultation with your investment adviser, you may adopt various strategies using
ETFs, which are summarised below.
Core and satellite approach
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.
Strategic asset allocation
ETFs can be used in portfolio construction as core holdings to improve portfolio
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).
Sector rotational strategy
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.