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ETF schoolLevel 2Intermediate8 minUpdated Portfolio ETFs: a ready-made portfolio in one product
A portfolio ETF contains a ready-made allocation: stocks and bonds from different regions, with a portfolio manager rebalancing the weights regularly. This chapter looks at the mechanism: what parts it consists of and what rebalancing means.
A ready-made portfolio in one trade
Traditionally, an ETF gives you exposure to one asset class. A portfolio ETF goes one step further: it's a ready-built portfolio that holds several asset classes and regions, often through other ETFs.
For the investor, this means that the allocation and rebalancing come prepackaged. You don't have to decide the weights of stocks and bonds, pick regions or reset the weights after market moves.
What is an active portfolio ETF?
ETFs are usually thought of as passive index trackers: they track a predefined index, such as the S&P 500 or MSCI World. In that case, the fund's contents and weights are determined by the index.
An active ETF works differently. The portfolio management team makes the investment decisions itself: what to own, at what weights and when to make changes. So the fund doesn't track any single index; it is actively managed according to market conditions.
In the portfolio ETF series, this shows in three things
- Allocation between stocks and bonds. Each fund has a target risk level, but the portfolio management team has leeway to overweight stocks or bonds depending on market conditions.
- Selection and weighting of the underlying ETFs. The fund invests in other ETFs. The portfolio management team chooses which products are used and at what weights.
- Rebalancing and risk management. When markets move the weights, the portfolio manager rebalances the portfolio as part of the product's structure.
The ETF structure brings the exchange's daily liquidity, transparency and low minimum investment. Active management, in turn, means that the allocation decisions are made for you and the portfolio is kept up to date.
You choose the risk level in advance
The series has deliberately been kept small: three risk levels are enough to cover the most common investor needs. The difference between the levels is above all the weighting of stocks and bonds: the bigger the equity weight, the bigger both the return potential and the volatility.
The equity and bond weights are indicative illustrations. BlackRock doesn't state fixed target allocations for the funds, and the actual weights vary and can differ clearly from those shown. Up-to-date information and risks can be found in the fund's key information document.
Three products, three risk levels
The same mechanism, three risk levels. The ratio of stocks to bonds affects both the expected return and the volatility.
Conservative
- Stocks
- about 40%
- Bonds
- about 60%
Moderate
- Stocks
- about 60%
- Bonds
- about 40%
Growth
- Stocks
- about 80%
- Bonds
- about 20%
The equity and bond weights are indicative illustrations. BlackRock doesn't state fixed target allocations for the funds, and the actual weights vary and can differ clearly from those shown. Up-to-date information and risks can be found in the fund's key information document.
Who this suits, and who it doesn't
A portfolio ETF can suit an investor who wants a globally diversified portfolio in one trade, values an active allocation view and wants to outsource rebalancing.
It isn't automatically the cheapest option. If you know how to build a diversified ETF portfolio yourself and want to, a passive portfolio of your own can be cheaper in terms of costs. The value of a portfolio ETF comes from the allocation, fund selection and rebalancing being done for you.
How does a portfolio ETF compare with the alternatives?
There are many ways to build a globally diversified portfolio. An investor can make the allocation decisions themselves using ETFs, outsource them to a traditional wealth manager, or choose an actively managed portfolio ETF, where the portfolio management is packaged in the form of an exchange-traded fund.
A portfolio ETF's ongoing charge is typically higher than that of a fully passive index ETF, but clearly lower than traditional wealth management, where the annual fee is often around 1.0–1.5%.
Frequently asked questions about portfolio ETFs
How does an active portfolio ETF differ from an ordinary ETF?
An ordinary ETF usually tracks a specific index. In an active portfolio ETF, the portfolio management team decides how the money is divided, for example between stocks, bonds and different market regions. For the investor, this means that the allocation and rebalancing come prepackaged in a single product.
Who might a portfolio ETF suit?
It can suit an investor who wants a globally diversified portfolio in one trade, values an active allocation view and wants to outsource rebalancing. The option is especially interesting if the investor doesn't want to build and maintain a portfolio of several ETFs themselves.
How do I choose a suitable risk level?
Base the choice on how much volatility you're prepared to accept and what role the fund has in your portfolio. If volatility worries you, a more moderate option is a safer starting point.
The most important thing is to choose a risk level that lets you stick to your plan even when the market doesn't develop the way you hoped.
Is a portfolio ETF the cheapest option?
Not necessarily. If an investor knows how to build a globally diversified ETF portfolio themselves and wants to, a passive ETF portfolio can be cheaper in terms of costs. The value of a portfolio ETF comes from the allocation, fund selection and rebalancing being handled on the investor's behalf.
Do these funds invest directly in stocks and bonds?
Portfolio ETFs often invest mainly in other ETFs. In practice, then, they are ready-built ETF portfolios in which the selection and weighting of the underlying funds is actively managed.
This content is for information purposes only and should not be construed as investment advice or a recommendation. Investing always involves the risk of losing capital. The value of financial instruments and investments can go up or down, and past performance is no guarantee of future returns. The calculators and comparisons are illustrative.
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