Some advisors adjust asset allocations only for periodic rebalancing, but others see opportunities in the market and want to take tactical advantage of them. For the second group, exchange-traded funds can be ideal. While ETFs don’t eliminate market risk, their broader-based portfolios can mitigate company and sector risk.

“If you want to be aggressive, then you can certainly take a narrow sector,” says Morris Armstrong, owner of Armstrong Financial Strategies, an RIA in Danbury, Conn. He used a Japanese equity ETF last year to make such a tactical play. But, he cautions, no matter how you approach tactical allocation, you have to first be allowed that flexibility in your investment policy statement.


Though he sometimes buys narrowly, Armstrong often uses broad-based instruments like the Vanguard Total Stock Market ETF (VTI). He recalls buying that ETF for clients early in the trading session near the day’s low when unemployment numbers were released a few months back. Armstrong believed the market’s initial reaction to the numbers was wrong. Later in the day, the market rallied. The move gave his client portfolios an instant beneficial overweighting in domestic equities, which he was able to unwind at a profit a few weeks later. “That makes you feel good,” Armstrong says.

While Armstrong favors technical analysis to determine tactical allocations, Ray Mignone of Ray Mignone & Associates in Little Neck, N.Y., uses fundamental analysis to determine his moves. He believes ETFs are good for tactical allocations, which can be anywhere from 5% to 20% of a total portfolio, though usually about 10%.


“A few years ago, we overweighted high-yield bonds, because they were very cheap,” Mignone says. He sold the position back when high-yield debt returned to a more reasonable valuation. Mignone has no definitive schedule to exit a tactical position. “It could take two years to play out, or it could take three months,” he says. “Asset classes will usually revert back to the mean over time.”

Regardless of the timing, Mignone advises paying attention to one key characteristic when seeking a tactical fund. “I try to stick with highly liquid ETFs,” he says, noting that they are easier to buy and sell when the market is under stress. “I want to see a lot of volume,” he adds.

Armstrong observes that tactical allocators must always be aware of tax consequences, particularly for older clients. “You pop up capital gains and all of a sudden they’re paying another $1,200 a year in Medicare premiums,” he says.

Joseph Lisanti, a Financial Planning contributing writer in New York, is a former editor-in-chief of Standard & Poor’s weekly investment advisory newsletter, The Outlook.

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