Blending Index and Active Investment Strategies
Blending index-investing based ETFs with active management strategies can offer a number of benefits, including reducing overall costs versus an all-active portfolio and improving benchmark tracking. For many investors, blending ETF investment strategies takes the form of a "core/satellite" portfolio. For example, a "core" asset allocation such as large-cap domestic equity is implemented with ETFs, while active managers are used for "satellite" investments for a portion of the allocation seeking higher return and therefore warranting greater potential risk.
Having part of an asset class allocated to an ETF investment frees up the investor's active manager(s) to dial up their risk exposure in pursuit of greater returns while helping to keep the portfolio in line with the investor's risk/return objectives. Investors seeking to be closer to their asset allocation targets can incorporate index tracking ETFs alongside active managers, particularly if the active managers "drift" from their stated styles.