Investment philosophies and ETF strategies

Investment philosophies

There are many different types of investment philosophies that investors may adhere to, ranging from short-term day traders including technical analysts and algorithmic traders, to long-term buy-and-hold investors with, say, a focus on value or growth investing. An unexhaustive list of common investment philosophies includes:

• Market timing
• Security selection
• Activist investing
• Passive investing
• Fundamental (Value, Growth, Momentum, Quality)
• Quantitative (Technical analysis, Quant-amental)

Essentially an investment philosophy is a way of thinking about the markets; how they work, how efficient they are, and how to best generate some sort of return. A philosophy is an anchor that facilitates the consistent creation of new investment ideas or strategies.

For example, an investor who believes in market timing may try to rotate their portfolios into different allocations to respond to a given market environment. They may have a stance that we are heading into a recession and want to rotate their investments into those with defensive characteristics.

An individual investment philosophy is less about following what has worked for other people, and more about finding what works for the individual investor, and/or what that investor believes in. An investor who wholeheartedly believes that technical analysis does not work will, generally, be unable to apply it effectively. Whereas, those who have a strong belief that technical analysis works may probably be able to find strategies that make it work for them.

Different types of ETF strategies

ETFs can be used to convey a market view no matter what an investor’s investment philosophy is. Here are some examples based on the different investment philosophies listed above.

Market timing – those who believe in market timing can take advantage of leveraged ETFs to express market views based on timing. For example, if an investor expects that there will be a ‘beat’ on GDP expectations then they may invest in a leveraged ETF such as TQQQ, or another ETF that may be expected to outperform when GDP expands.

Security selection – historically those who believe in security selection would stay away from broad-based ETFs in favor of selecting individual investments. However, with the advent of single-stock ETFs investors are able to express a conviction on individual security. For example, an investor who is very bullish on Tesla may invest in TSLL, which is a 1.5x leveraged ETF with exposure to Tesla.

Passive investing – ETFs were designed for passive investing given that they can be used to gain broad-based exposure to many securities at once. There are various sector ETFs such as XLF for the Financials sector or XLB for the Materials sector.

Fundamental – there are various different factor-based ETFs that investors can gain exposure to. Such as VTV(Vanguard Value ETF) or MTUM (iShares MSCI USA Momentum Factor ETF).

Conclusion

In conclusion, it is clear that there are various ways to generate a return in the market.  And for investors wishing to express a philosophy or market view, ETFs, make it easier than ever to do so. 

Please note this article is for information purposes only and does not constitute investment advice.