Carrying Out Particular Strategies

What if you as an investor have a reasonably conservative portfolio that you work hard to protect? You can use ETFs in various hedging strategies because you can easily assume a short position. Basically, hedging refers here to taking a position opposite your current one in an attempt to reduce the risk. For example, if you own a portfolio of stocks that you plan to continue to hold but you fear a sharp market correction and wish to protect yourself at least partially, you could assume a short position at the same time you continue to hold the portfolio of stocks. A short position is a bet that the market will go down. By shorting one or more ETFs, you would profit if the market went down sharply because the prices of the ETFs would also decline. You would then buy back the positions you shorted at a higher price and replace them, profiting by the difference in the two prices.

It is possible to hedge sector, size, or industry exposure, and ETFs can be shorted on a downtick, unlike New York Stock Exchange stocks, thereby facilitating the taking of a short position at any time. ETFs would also allow this investor to take a flyer , or a speculative position on the market. The investor could make speculative bets on the market's returns or on the returns of specific segments of the market with a small portion of the overall portfolio assets.

ETFs allow investors to control sector exposure, which they might want to do as part of their overall portfolio strategy. By selling shares in the sectors that are overweighted and buying shares in the sectors that are underweighted, an investor can move much closer to some benchmark or desired goal. ETFs could also be used to fill a gap in a benchmark portfolio.

As another example, consider international investing. We have established that many financial advisers suggest that investors have some international exposure in their portfolios. With mutual funds it is easier to gain broad exposure to foreign securities because these portfolios are generally well diversified. However, what if you feel strongly that Japan is poised for a comeback from the horrific decline its economy has suffered in recent years , and you want to invest some funds specifically in Japanese stocks? In this case, an ETF might be your best choice because overall your choices are quite limited (and would otherwise involve a closed-end fund). Perhaps you think Mexico will benefit from the international agreements with the United States that liberalized trade arrangements. Once again, an ETF would make sense as a way to gain this exposure for your portfolio. ETFs target single countries , and when you wish to do this type of investing, ETFs are the alternative to pursue .

Folios offer investors the ability to fine-tune their holdings in a way that mutual funds cannot. With a mutual fund, you take the whole portfolio, whether you like it or not. With folios, you can do something about it. You can use screening tools and packages alongside the folio approach, thereby identifying stocks that meet your criteria. You can then eliminate those stocks from the folio.