Benefits and Uses of ETFs

Savvy investors are discovering what institutional investors have known for some time, that asset allocation is an important driver of long-term investment results. However, advanced asset allocation strategies have been difficult for many individual investors to implement, given the costs and investment size required to achieve more effective levels of diversification.

ETFs offer investors a sophisticated tool to efficiently gain exposure to broad market segments, encompassing a wide range of asset classes, equity market capitalizations and sectors. 

ETFs enable investors to build customized investment portfolios consistent with their financial needs, risk tolerance and investment horizon. It’s important to remember that diversification and asset allocation do not ensure a profit or guarantee against loss. Three examples of asset allocation and ETFs include: strategic asset allocation, core-satellite strategies, and tactical asset allocation.

Sample Uses of ETFs in Asset Allocation Strategies: Strategic Asset Allocation: Research shows that strategic asset allocation is one of the most critical factors in explaining the difference in returns across portfolios.² After investors decide what their long-term asset allocation will be—for example, equities vs. fixed income vs. commodities—they can then deploy SPDR ETFs, such as index fund ETFs, to build easily managed, low-cost portfolios that reflect the combined performance of the selected market indices.

Investors can also use ETFs to implement a core-satellite strategy. A core-satellite strategy seeks the broad market return as the “core” portion of a portfolio, and seeks additional diversification and returns in a “satellite” strategy that adds non-core market exposures.

Broad, market-based ETFs can be used as the core of an investment strategy. Sector, commodity-based, or other strategic or active ETFs can be used to add a cost-effective satellite portfolio to complement the “core” broad-market portfolio exposures. Such a strategy has the additional benefit of blending the general market risk of the core portfolio with the potentially riskier or more concentrated satellite portfolio exposures.  

In today’s ever-changing macro and geo-political environment, investors often need to make real-time adjustments to their long-term asset allocation to reflect changing views on short-term asset class performance. They may also wish to deviate from long-term asset allocation to take advantage of tactical, short-term opportunities provided by the market. ETFs offer efficient tactical asset allocation where ease of trading and low costs support ease in making tactical adjustments to portfolios. Tactical adjustments might include increasing allocations to markets and sectors that have become more attractive; or decreasing exposures to less attractive markets and sectors. Investors can also easily reverse these tactical moves once the opportunities and risks have run their course.

ETFs offer investors a sophisticated tool to gain exposure to broad market segments, encompassing a wide range of asset classes, equity market capitalizations and sectors. Investors can use SPDR ETFs to conveniently, efficiently, and affordably gain exposure to different markets through one transaction.

SPDR ETFs can offer a source of income from growth assets at a low cost. Structurally, SPDR ETFs invest in securities that generally correspond to a given index. That is, while the units trade like listed shares, they also benefit from the income streams of the underlying securities. The potential for low turnover (minimising capital gains), and overall cost-efficiency (typically a low management fee and operating costs), can make SPDR ETFs an attractive alternative for investors who want the potential for income from a growth asset class.

SPDR ETFs offer the opportunity to invest long term so as to maximise the compounding of returns.

The ease of trading in SPDR ETFs means investors can implement ongoing investment plans to build their positions over time with new capital, or to reinvest dividends.

Sales charges, entry/exit fees and high expenses can impact the performance of a portfolio over the long term. By using investment vehicles that have low management fees and adopting low turnover trading strategies, performance impact can be reduced.