A growing market for exchange-traded funds (ETFs) is giving investors more flexibility when it comes to building their portfolios.
It is now possible to create ETF-based portfolios covering at least the main asset classes. In other words, the ETF toolbox is in place for a widely-diversified portfolio.
For instance, Australian investors now have access to index-tracking, Australian-listed ETFs covering such areas as Australian and international fixed interest; Australian, international and emerging market shares; US, European and Asian (ex-Japan) shares; and Australian property securities.
Particularly given the ability to create diversified, all-ETF portfolios – or balanced core portfolios using ETFs – their appeal is set to continue to strongly grow.
Recent ASX research shows the market capitalisation of Australian-listed exchange traded products – the vast majority being index-tracking ETFs – grew by 86 per cent over the two years to September to reach a record high of $24 billion.
Much of this rapid growth in the market capitalisation of locally-listed ETFs is attributable to new investments, not market returns.
Investors who decide to create all-ETF portfolios – or use a range of ETFs as the core of their diversified portfolios – should not, of course, overlook the importance of periodically rebalancing. This is an investment fundamental – no matter how a portfolio is created.
Rebalancing involves bringing an investor’s portfolio back in line with its strategic or target asset allocation. An appropriate asset allocation takes into account each investor’s risk tolerance, time horizon and financial goals.
Over time, a portfolio is likely drift from its target asset allocation as different markets move up and down. And the portfolio may acquire different risk-and-return characteristics that may be inconsistent with an investor’s goals and preferences – unless it is rebalanced.
It may seem counterintuitive for investors to rebalance portfolios by selling their best-performing assets and committing more capital to underperforming asset classes. In short, rebalancing requires a disciplined approach to investing.
Rebalancing a portfolio can be straightforward in practice – particularly with easy-to-trade assets such as ETFs. Perhaps the toughest task for investors is to convince themselves to sell a top-performing asset.
