Exchange-traded funds (ETFs) can play an important role in the construction of diversified, global investment portfolios.
In a recent webinar, CoreShares Asset Management’s Client Coverage Executive, Michelle Noth, outlined the importance of building portfolios that are fit for purpose and explained how ETFs can be put to use.
As a starting point, an investor must clearly define their investment goals, their time horizon, and their appetite for risk. This will inform the appropriate mix of assets, including allocations towards individual securities.
Noth noted that predicting the performance of different asset classes is a difficult task, with each performing under different scenarios. Within each asset class – whether equities, fixed income, property or cash – picking individual securities is even more challenging.
Academic studies show that only a small proportion of actively managed equity funds are able to consistently beat the market after taking fees into account.
With this in mind, ETFs are increasingly sought after. These products deliver market-related returns while significantly reducing costs. They also provide diversification and generate more predictable outcomes.
One approach to using ETFs is to combine them with active stock selection. Based on personal goals and an investor’s time horizon and appetite for risk, a ‘core-satellite’ approach to portfolio construction may be optimal.
In this scenario, passive strategies such as ETFs make up the bulk of the portfolio. They provide low-cost access to broad market returns. They are then supplemented by satellite investments, which target specific securities with the aim of generating outperformance.
Alternatively, ETFs could make up the satellite component of the portfolio, with a long-term personal stock portfolio at the core. In this instance, the satellite element could be employed to enhance diversification or to target specific needs, for example, generate additional income in the form of dividends.
Another approach is to create a global multi-asset strategy, using ETFs as building blocks for the various regions and asset classes.
CoreShares also offers two multi-asset funds, each of which is targeted at different client needs.
The CoreShares Wealth Accumulation fund is aimed at the pre-retirement investor, who has a long time horizon and therefore can focus mainly on asset classes that tend to outperform over the long term – equities and property in particular.
The CoreShares Stable Income fund, on the other hand, is for investors who are close to retirement or in retirement. This group is less inclined to tolerate risk, meaning the fund is weighted more towards assets that provide a reliable source of income.
Noth added that ETFs can be used as building blocks for a range of portfolio types.
We invite you to watch this on-demand webinar to explore these concepts further: