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Are ETFs important in any strategic asset allocation?

Team Veye | 17 Feb 2020

Are ETFs important in any strategic asset allocation?

It is common knowledge that the right investment portfolio cannot be built without understanding how to use strategic asset allocation. Investors should know the right allocation so as to maximise the expected returns of their portfolio while simultaneously having the lowest amount of acceptable risk. 

Risk return correlation is an extremely important characteristic of stock market investing. High risks have often meant greater returns and vice versa. Risk management is this act of identifying and assessing the potential risk and developing strategies to minimize these and earn maximum possible returns.

Risk management in a portfolio can be achieved through strategic asset allocation. Weighted according to risk, this way one can make investments in various asset classes while striking a risk balance. In this manner, one can opt for a mixture of stocks, bonds and other assets weighted in such a way that the total allocation and expected returns match.

Another important rule of investing is diversification. So, using a strategic asset allocation strategy becomes extremely important to diversify and simultaneously mitigating portfolio’s risk exposure.

One of the best ways to have both diversification and strategic asset allocation is with ETFs. ETFs can be used strategically to design a custom portfolio tailored to the needs of the investors.

ETFs operate as a mixture of stocks and mutual funds in that they are liquid assets, easily traded in the market, but come with a basket of stocks, helping add diversification to a portfolio

Exchange-traded funds offer multiple layers of liquidity that make ETFs more cost-efficient to buy and trade than their underlying securities. ETFs can play the role of stocks or bonds depending on what investors need in their portfolio to achieve the right balance. As an asset class, ETFs are extremely diverse and give investors the desired options.

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