Recognise and explain the ways ETFs can be used in a portfolio
The idea
ETFs are used for many portfolio jobs. Cash management: equitising idle cash, such as a new contribution or dividends, so it earns market returns until it is invested. Tactical and strategic allocation: taking cheap, quick positions in markets, sectors, styles or factors, including smart-beta and thematic exposures. Rebalancing and completion: adjusting exposures without trading many securities, or filling gaps a portfolio leaves. Transitions: holding exposure while managers are replaced. Hedging: short-selling a sector or market ETF to neutralise an unwanted exposure without selling the underlying holdings. Core-satellite and dynamic strategies also rest on ETFs. The trap is choosing an ETF only on its expense ratio when the job, such as a short-term hedge, calls for liquidity and low trading cost.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
Take the free diagnostic →More in Exchange-Traded Funds: Mechanics and Applications
- Explain how ETF shares are created and redeemed and what role authorized participants play
- Set out how ETF shares change hands on the secondary market
- Set out where ETF tracking error comes from
- Set out what influences the bid–ask spread on an ETF
- Set out why an ETF can trade above or below its NAV
- Set out what an ETF costs to hold
- Set out the risks ETFs carry