What They Are and How to Invest in 2023

Are you looking for information about Balanced ETFs? Can they prove to be a convenient investment?

The Balanced ETFs they are relatively new as they have been out for a few years, but only in 2021 did they really begin to spread and to attract the attention of investors, and above all to be proposed and distributed by management houses.

ETFs had set out to be the best alternative to mutual fundswhile recently it seems that they want to adapt to them, and almost look a little like them.

Also the Balanced ETFs they are also said ETFs of ETFs.

If you want to know more, you just have to continue reading the article, in which we will analyze this tool in depth to understand its characteristics and possible convenience.

What are ETFs

The ETF (exchange trade funds) are passively managed funds that replicate the performance of the benchmark, i.e. the reference index.

They appear as interesting instruments in the eyes of investors, as they have very advantageous characteristics.

First, an ETF is more likely to beat the index than an actively managed fund, i.e. a mutual fund.

In addition to this, we can include other reasons that often lead ETFs to be preferred and chosen for a possible investment compared to mutual funds:

• Lower costs: in the case of mutual funds the management cost is higher, as the price to pay must remunerate the management company that invests the money for us, therefore we can say that the management cost includes the “work” of the manager and the sales structure. ETFs on the other hand, being passively managed, do not have this burden, and often their annual cost is on average between 0.20% and 0.80% when we are already talking about expensive funds;
• Greater transparency: an ETF makes us understand clearly where our money is invested, while instead in the case of an actively managed fund it is the manager who makes decisions over which we have no control;
• Greater liquidity: an ETF can be bought and sold very quickly, and it is also possible to disinvest quickly, while this is not the case for mutual funds which are sometimes not listed on the stock exchange and consequently cannot be traded quickly;
• Better performances: as we mentioned earlier, 90% of actively managed funds fail to beat their benchmark, while an ETF often does.

Make a investing with ETFs it also allows you to get a good diversification low price.

What we mean by balanced ETFs

Now that we have thoroughly reviewed what ETFs are, we can focus on the balanced ones, which are the focus of our discussion.

Let us first recall that there are different types of ETFs, which can link their performance both to stock market indices and to energy and non-energy commodities.

We can also come across sector ETFs, that is, investing in a single sector (for example in the energy sector, or consumer discretionary goods, or even information technology), in ETF who invest in mega trend (which can be the aging of the population), in ETF Smart Betawhich is based on a particular strategy.

The Balanced ETFs instead we can imagine them as containers (for this reason they are also called ETFs of ETFs).

How do they work? The manager buys a diversified portfolio of other instruments, thus creating a portfolio balanced according to the degree of risk.

What should this wallet look like?

It must be consistent with both the investor’s risk appetite and investment objectives.

Materially, therefore, you will find yourself investing in a single instrument, which however contains different degrees of risk.

I’ll try to give you an example, to make it clearer.

For example a Balanced ETF can consist of 20% of Stock ETFswhile for the remaining 80% from ETF bonds. In this case, therefore, we could say that we have a highly defensive portfolio.

Conversely, if we had an ETF made up of 80% equity ETFs and 20% bond ETFs, then in this case we could say we are dealing with a riskier portfolio.

The rationale behind balanced ETFs is to allow investors to have access to investment solutions multi-asset low-cost and diverse.

Indeed, if you were to choose to invest in a balanced ETF, you would find yourself gaining access to a variety of securities, through a combination of stocks listed on markets around the world and bonds issued by countries or companies in the markets.

In this case we can therefore draw a parallelism with the balanced funds, of which find the review here.

In fact, it is the first time that we can make a comparison between mutual funds and ETFs, since, as we well know, they are two different instruments and almost opposite to each other.

In fact, we can say that an ETF which, given 100 of our portfolio, is made up of at least 70% bonds, can be assimilated to a prudent balanced fund, while, for example, an ETF which has 60% of the portfolio in equities, can be assimilated to a moderate balanced fund.

Currently the ETFs of ETFs for sale on the Italian market are the Vanguard Lifestrategywe have reviewed here and theXtracker Portfolio which was born earlier, but which is more restrictive as regards the distribution of instruments: in fact, it invests in a globally diversified portfolio made up of equity, bond and commodity ETFs. The tactical allocation is reviewed and rebalanced every quarter, and is made up as follows: equity quota: minimum 15%, maximum 30%, bond quota: minimum 60%, maximum 85%, commodities: maximum 10%.

What are the advantages of balanced ETFs?

These A multi-asset ETF are offered with the aim of giving investors value.

The objective of these funds is to provide a combination of long-term capital appreciation by investing in fixed income equity securities.

Obviously we are dealing with active management, since the investment manager is free to choose the composition of the fund’s portfolio, and in fact it is not managed with reference to a benchmark.

Up to here we see how they could be assimilated to mutual funds.

But what differentiates them from them?

Again i costs: as regards the costs of the Vanguard we are on 0.25% per year (which really means a very low cost), while for the Xtracker we settle on 0.70%, one then higher than the other but still much more contained compared to the costs of mutual investment funds, which are usually around 1.30% and can even reach 2%.

The risks of balanced ETFs

But we have gods risks if we decide to invest in these particular ETFs?

I ETF managers are more constrained than managers of a balanced fund. How come?

ETF managers meet every x months at rebalance the portfolioHowever, since they have to keep costs down, they will always and only try to rotate their ETFs within the portfolio, to maintain the constraint they have, for example of an 80% share in the portfolio.

Fund managers, on the other hand, on the other hand, find themselves having a higher operating margin, as they can range across all markets, whether they buy shares, ETFs, futures, but also other funds, etc…

Should you invest in balanced ETFs?

We have reached the end of our discussion.

Now you may be wondering if It is worth investing in this type of ETF.

First of all, I would like to remind you that, before investing, it would be optimal to have a clear understanding of your investment strategy, and also your risk profile: only in this way will we then be able to make rational and suitable choices for us.

If you’ve already had the opportunity to read other resources here on the blog, you may have already understood my investment strategy.

In fact, I believe that investing in the long term is the best thing.

If we dwell on these tools, we can say that they are recently introduced tools (we are talking about 2 or 3 years old), so in the face of this we cannot have enough data to be able to draw in-depth conclusions.

Surely both the ETFs offered by Vanguard and the Xtracker one are valid and safe tools, as the group that offers them is serious and reliable, so from that point of view you shouldn’t be afraid.

They are a rarity, as as we have seen there are only two offered on the Italian market; we can say that they actively invest without any regard to a benchmark, and that they invest in a basket of underlying ETFs, and therefore define a balanced profile.

The advice I can give you, first of all, is to have clear the investment goals and the risk propensityand consequently, starting from these two pieces of information, start investing by defining theasset allocation.

Conclusions

If you are at the beginning of your investment journey and you don’t have the basics, here are some guides designed for you:

If, on the other hand, you are interested in learning more about the range of offers that exist in the world of finance and investments, I suggest you read these courses that I have prepared for you:

Good reading and good continuation on Affari Miei.