The availability of ETFs which cover a broad range of investment sectors, styles, and capitalizations offers investors seeking alpha a wide variety of ways to express tactical views that seek to add incremental return to a portfolio. For example, an investor can underweight or even short¹ a market sector or asset class on which he has a negative near-term view. Alternatively, he could tactically layer on exposures to targeted asset classes he believes have strong short-term prospects. Within fixed income investing, investors can use ETFs opportunistically to choose their desired effective duration** and help manage credit risk in anticipation of interest rate movements in an attempt to earn additional return.
* Alpha is the level of outperformance of a portfolio over and above its benchmark.
** A measure of the responsiveness of a bond or portfolio’s price to changes in interest rates. Effective duration takes into account the possible changes in the expected bond cash flows due to interest rate changes.
¹ With short sales, an investor faces the potential for unlimited losses as the security's price rises.