Asking and Answering the Right Questions for Your ETF Portfolio | ETF Trends

Recently I had the opportunity to talk about asset allocation with a talented financial advisor. We discussed ideas about combining asset classes and strategies in the optimal way to meet the needs of his clients. As we reviewed whether a particular exchange traded fund (ETF) strategy would be appropriate, I asked him, “What question do you expect this ETF strategy to answer?” 

Was the strategy trying to answer question one: “Should the portfolio be in the asset class or not right now?”  or was the strategy trying to answer question two: “What segment or sub-component of the asset class should the portfolio be in right now?”

Notice that question one is an “in or out” question. Strategies that tend to answer this question focus on compounding returns over time by limiting the downside of a particular asset class. We would expect the potential to be “out” of the market would lower volatility and lower drawdown over time, but it would also result in times of being “out” during rallies in the asset class...