While the expansion of the $3 trillion ETF industry continues to attract attention for the sheer size and popularity of this investment vehicle, there is yet another reason to favor ETFs—one that’s near to my heart as an economist and investment manager.
ETFs allow you think and invest like an economist, and not a stock picker. Rather than chasing after the hottest “name” or the latest “tip,” investors can develop an investment rationale and pursue their goals accordingly using ETFs.
I am on record as saying that the ETF is the great financial product innovation since the creation of the put option. With the put option, it suddenly became far easier (without the complexities of creating a synthetic position) and less risky to establish a short position by buying one instrument.
ETFs are just as revolutionary and for many of the same reasons. Through ETFs, investors have the ease and flexibility of establishing long and short positions by buying an instrument. And, ETFs provide the added benefits of low cost, transparency, all-day access (they trade like stocks), and vast exposure, including to asset classes that until recently were off limits to the average investor.
A Fundamentally-Driven Approach
At our firm, we use a fundamentally driven, macroeconomics-based approach to asset allocation. In simplest terms, when the economy is growing (as determined by our proprietary Astor Economic Index®) we believe it is an opportune time to hold risk assets (i.e. equities). Conversely, when the economy is contracting, we believe it is best to reduce equity exposure, increase fixed income holdings, and/or hold inverse equity positions. And all of these objectives—long equities, short equities, fixed income, as well as exposure to international and industry sectors from transportation to biotech—can be accomplished by buying ETFs.
Currently, we view the growth of the U.S. economy (albeit at a somewhat slower pace these days as indicated by the Astor Economic Index®) as reason to have equity exposure. Currently, within our investment portfolios, we have established exposure to the broad market using ETFs such as iShares Core S&P 500 (IVV) and iShares Core S&P Total U.S. Stock Market (ITOT); and to specific sectors using ETFs such as First Trust Financials AlphaDEX (FXO), First Trust Technology AlphaDEX (FXL), and First Trust Health Care AlphaDEX (FXH).
Similarly, once investors make up their minds about the kind of exposure they’re seeking—broad market, industry sector, domestic, international, fixed income, and more—they can rest assured that there’s an ETF to provide that exposure. As my colleague, Bryan Novak, noted in his recent column, a little due diligence and some homework will help investors choose the right ETF for their desired market exposure and investment objectives.
The explosive growth of ETFs has been on the investment industry’s radar for the past couple of years, including last year’s record-breaking pace of fund creation. We don’t expect the fervor to die down any time soon. But in the excitement for these facile instruments, we shouldn’t lose sight of an important fact: ETFs help you focus on fundamentals to think—and invest—like an economist.
Rob Stein is the Founder and CEO of Astor Investment Management, a fundamentally driven, macroeconomics-based asset allocation firm. (www.astorim.com)
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At the time of writing, Astor Investment Management held IVV, ITOT, FXO, FXL, and FXH among its universe of ETFs included in its multi-asset portfolios. Astor Investment Management is a fundamentally-driven quantitative asset manager that seeks to empower clients with economics-based tools and portfolio solutions to reduce risk and help attain investment goals. Contact Astor at 1-800-899-3230 or firstname.lastname@example.org. For a complete list of relevant disclosures, please click here