This is the first of a three-part series on how ETFs can help control costs when constructing core portfolios.

Fundamental analysis is the stuff of cocktail parties, water-cooler gossip, and 24-hour financial news networks. Based on business facts, the main allure of fundamental analysis is the intellectual satisfaction it provides: it is logical. Most professional money managers use fundamental analysis in some form of top-down or bottom-up analysis. Regardless of portfolio size, controlling costs is important, and ETFs can help.


Starting with global, regional and local economies, this approach assesses the impact of the economy on sectors, industries and companies. ETFs lend themselves nicely to these strategies because they make country, sector and industry investing simple. For example, institutional managers can use ETFs to establish broad exposure before making specific investments and they can hedge existing exposure by shorting the relevant ETF. During the banking crisis in 2008, shorting financial stocks was prohibited, but there was no such restriction on ETFs. Institutions used ETFs to maintain liquidity in the face of uncertainty. Portfolios for individual investors can similarly benefit from diversified exposure. Just remember, sector and industry ETFs tend to be more expensive than broad-based ETFs.

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Mark Yamada
June 22, 2010

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