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How to diversify portfolios with ETFs?

How to diversify portfolios with ETFs?

Unlocking the potential for diversified and strategic investments, Exchange-Traded Funds (ETFs) have emerged as a cornerstone in contemporary portfolio management.
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26 DEC, 2023

By Johanna Zidani from RankiaPro Europe


ETFs stands out as a transparent and cost-effective strategy to enhance portfolio diversification. In addition, these investment instruments enable strategic positioning in specific market segments or assets that might be challenging to access through alternative investment vehicles. This makes ETFs a versatile and efficient tool for investors seeking broad exposure and targeted opportunities in their portfolios.

Willem Keogh, Head of Investment Research for ETFs and Index Funds at UBS AM

ETFs present excellent opportunities for diversification, allowing investors to access a broad range of asset classes, geographic regions, sectors, and sustainability profiles. Depending on their investment objectives and preferences, investors can incorporate specific ETFs into their existing portfolios to diversify their global exposure.

Let's consider a practical example of an investor aiming for a globally diversified portfolio with moderate risk characteristics. Assuming a classic 60-40 strategy, an investor could allocate 60% to a global equity ETF and combine it with a 40% investment in a global aggregate fixed-income index ETF. On the equity side, by, for instance, purchasing an ETF tracking the MSCI All Country World Index, the investor gains exposure to approximately 2,950 equity securities from both developed and emerging markets. Similarly, by investing in an ETF following the Bloomberg Global Aggregate Bond Index, the investor would have access to over 4,000 bond issuers and 29,000 individual bonds with investment-grade ratings from issuers in 71 countries, covering both developed and emerging market debt.

Such an investment strategy would result in a well-diversified portfolio across two asset classes and various geographies with generally low Total Expense Ratios (TER). In addition to these advantages, investors would benefit from daily transparency regarding portfolio components and the flexibility to trade ETFs on the exchange like stocks.

Beyond the diversification aspects offered by ETFs, investors can also use them to customize their strategic or tactical asset allocations, as well as to consider other investment criteria such as sustainability. Examples include ETFs providing exposure to sustainable and climate-related themes, commodities, specific factor tilts (e.g., value or growth), or specific investment themes (e.g., gender equality), among others.

ETFs provide investors with the flexibility not only to diversify their portfolios transparently and cost-effectively but also to fine-tune their exposures by investing in ETFs with very specific investment objectives that align with the investor's goals.

By Olivier Paquier, Global Head of ETF Sales at AXA IM

Traditionally considered a vehicle for passive equity investing, today’s ETFs have evolved to offer a much wider range of options. Although passive equity continues to dominate global ETF AUM, investors now familiar with the potential benefits of the ETF structure – such as ease of access, greater transparency, and liquidity – are increasingly demanding more options for using ETFs in different ways. This is driving significant growth across other segments of the ETF market including asset classes such as fixed and commodities, and new sectors, geographies and themes, as well as different investment styles such as smart beta and active. 

Recent market volatility has demonstrated why access to such opportunities for diversification is so important. ETFs can help build well-diversified portfolios across various asset classes, industries and regions, mitigating the idiosyncratic risks of a single stock or bond approach in one efficient trade. Furthermore, a key benefit of using ETFs is that the natural liquidity of the product makes for a cost-effective approach to adjusting a portfolio’s asset allocation to reposition in a rapidly changing market environment. 

ETF providers, such as AXA IM, are offering accessible and diverse ways to put cash to work with professional investors at relatively low cost. We are working on product innovation to offer greater choice in aiming to generate return and pursue other long-term investment goals on all core asset classes. For example, products offering plain vanilla exposure to US tech companies can be cost-effective building blocks of a diverse portfolio. Or investors seeking to benefit from the specialist expertise of experienced portfolio managers may choose an actively managed approach in a specific area such as European or USD Credit for example. And then there are those wishing to combine aiming for financial return with sustainability goals. In this case, actively managed ETFs dedicated to an ESG specific theme can be relevant. 

In our view, operational ease, cost efficiency and availability of the wrapper across equity or bond exposures, or passive and active strategies, makes ETFs an ideal tool for efficient asset allocation and a well-diversified portfolio.

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