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Using Exchange-Traded Funds Opportunistically: An Overview

Using Exchange-Traded Funds Opportunistically: An Overview

Exchange-traded funds can be great tools in your investing toolbox. They can be cheap, flexible, and tax-efficient. But to benefit from what they have to offer, you must make sure that the ETF(s) you choose to invest in align with your investment thesis. Long-term investors with a strategic portfolio should resist "short-termism" and avoid the temptation to pile into the hottest-performing funds. Likewise, investors with shorter horizons that are looking to make tactical bets in their portfolio should identify the ETF(s) that would be most impacted by whatever catalyst they seek to exploit.

There’s plenty of money to be made from opportunistic investments in stock ETFs. What many investors forget is that an investment in a stock ETF isn’t a wager on the value that the market places on a piece of paper. It’s an ownership stake in dozens, if not hundreds, of underlying businesses. With broadly diversified ETFs, idiosyncratic risks (that is, single stock risks) are nullified, which means that investors are left exposed to the "market risks" (or beta) of the broader industry trends and economic forces that drive the performance of the ETF’s constituents. As such, the key to successful, market-beating ETF investing is an unerring focus on long-term economic and business fundamentals.

Will it eventually even out?

You’re probably wondering how this helps you beat the market. If we assume that the market, for all of its short-term gyrations, is efficient over the long haul, then we would expect the prices of assets to eventually converge to their intrinsic values. Thus, if the market is bidding down various businesses, perhaps because sentiment has turned sharply negative, but the intrinsic worth of those firms hasn’t changed one iota, we’d expect the market to eventually see the error of its ways and push up the prices of those businesses to a level that approximates their fair value.

Ben Graham’s wise analogy

Legendary investor Benjamin Graham summed this concept up nicely by stating that in the short term the market is a voting machine, but in the long run it is a weighing machine.