ETFs that leverage performance are still held in contempt by many individuals within the financial services industry. Usually, it’s because those indivduals don’t understand the products or they don’t understand how and where leverage belongs in portfolio construction.
Before an advisor attempts to use leveraged ETFs inside client portfolios, it’s crucial to have a logical framework.
Only after an advisor has first built a person’s core portfolio can the process of constructing the tactical or non-core portfolio begin. Remember, the core maintains exposure to all the major asset classes (stocks, bonds, commodities and real estate) at all times. The only tactical thing the core portfolio will ever do is to dial up or down a person’s exposure to a particular asset class.
By comparison, the non-core portfolio is tactical and can invest in things like individual stocks, derivatives, private equity, venture capital, volatility and other non-core asset classes. Since the non-core portfolio is always complimentary to the core, it’s typically smaller in size and can also hold tactically designed assets like leveraged long or short ETFs.
Along with this disciplined framework for investing in leveraged funds, there are other factors that advisors need to know before diving in.
1. Use Leverage Only in Sharply Trending Markets