Warren Buffet likes to say that “An idiot with a plan is better than a genius without a plan”. With this in mind imagine what a genius with a plan can achieve? That is why before you start investing it is critical that you have some kind of plan and better yet an investing strategy before you start investing. This will allow you to secure the best possible results , and this even applies to when you are investing in ETFs. In this article I have outline the main categories of investing strategies that you can choose and further develop in order to inform how you invest in ETFs.
1.Dividend investing .
Dividend investing can be considered as a strategy where you invest in ETFs which earn a dividend yield and re-invest this dividend yield back into the fund.ETFs are a very effective investment vehicle if you wish to enhance your investment portfolio by re-investing dividends. There are two ways in which ETFs can allow you to incorporate dividend payments into your investment portfolio. The first way is through re-distributions which are usually paid out frequently and re-invested into the fund. Redistributions are very effective in allowing you to gain better returns from your investment, and if you wish to learn more about redistribution you can use the following link :
Another way in which you can achieve dividend investing is by investing in ETFs that focus on dividend payments as part of their selection criteria. For example the CoreShares Dividend Aristocrat ETF or the Satrix DIVI ETF, are funds that achieve this objective.
This strategy is concerned with getting exposure into the equity market. By investing in an equity ETF you immediately gain access to a diversified and large portfolio of equities in different companies from different business sectors. This can be a more cost effective way to invest in shares, as you will not have to pay security transfer tax when you buy shares through an ETF versus buying them directly one by one.
A further benefit with ETFs is that the fund manager of the respective ETF would have already filtered through thousand of equities based on an investment strategy. Therefore , an ETF already consists of shares of which are believed to achieve certain financial objectives. Therefore, you get the additional benefit of gaining access to equities that you perhaps may not have included into your portfolio if a fund manager had not selected that asset for the fund.
3.Sector selection investing.
Sector selection investing can be understood as an investing strategy where investors target a certain business sector to invest in. For example an investor may just want exposure in the property sector, or they may want exposure in the commodity sector. With ETFs they are able to filter through the different listed securities and gain exposure only to the financial sectors that they are interested in. Furthermore, with sector ETFs investors are able to concentrate their exposure in that sector as they inherit a portfolio of many companies that are in that sector.
Examples of ETFs that accomplish this are the Satrix FINI 15 , the Satrix INDI 25 the CoreShares PropTrax SAPY. These are just some examples and there are so many other ETF options.
A hedging strategy is one that used to manage the risk in ones investment portfolio. It is concerned with protecting the investors portfolio against risk. This is often done by including assets in a portfolio that are inversely correlated with each other. For example if you have a portfolio that is heavily exposed in the emerging markets, you may want to mitigate your risks in this market buy having an investment vehicle that gives you exposure to the American markets or any other developed market. Therefore, if the emerging markets goes bust your losses can be mitigated by your exposure in the performance of the developed markets .
Another example would be South African investors who have a lot of exposure in the South African markets , they may want to invest in an ETF that gives them exposure perhaps to other financial markets outside of South Africa. Therefore, if he South African markets under perform any losses can be mitigated by your exposure in the performance of other financial markets.
ETFs may be used to give effect to hedging the investors portfolio against risk, because you can gain access to a pool of investments that can collectively mitigate any losses that may rise in your portfolio.
5.Asset class targeting strategy
An asset class targeting strategy is one that is concerned with building a portfolio that consist of specific asset classes. Normally the asset class of choice for this strategy is fixed income assets, such as bonds. With ETFs you are able to invest in a specific asset class, such as only in bond ETFs . With ETFs you can neatly target the specific assets that you wish to invest in.
Often diversification is cited when speaking about ETFs. Diversification is an investing principle that by having a range of different equities, assets or markets represented in your portfolio you are able to mitigate the risks in your portfolio. This is a debatable argument. Personally I feel that diversification is not often truly achieved with ETFs because often you are investing in one market, asset class or business sector and if that investment category underperforms then your investment will collectively underperform and some times the huge range of ETFs in one portfolio can worsen potential losses rather than mitigate against them , and I explore this concept more in the article which can be accessed using this link
However , ETFs can arguably be said to be good instruments for diversification. The argument being that one ETF grants you exposure to several securities at a time, and therefore if 20% of the fund underperforms and the other 80% of the fund performs well it could act as a hedge against any losses in the fund.
These are some of the main investing strategies that can be employed when investing in ETFs. You can always build upon these strategies or combine these principles and develop an impressive hybrid of a strategy. What is important at the end of the day is that you create a strategy before you start investing and use it to build a profitable portfolio.