ETFs are ideal portfolio building blocks for implementing an investment policy because they are cost-efficient, sharply defined, index tracking funds.
They are each dedicated solely to investing in one particular investment asset class and are designed to generate investment returns in line with the returns generated by the index for that asset class. This means that they are the purest way of implementing asset allocation decisions. They provide one-stop access to a broadly diversified portfolio of investments in their underlying asset class without carrying the active manager risk whereby disappointing stock picking within an asset class may undermine the general return provided by the asset class.
Studies show that it is asset allocation rather than stock picking which is the key determinant of the level of long-term investment returns. Over time, few active managers “beat the index” and many suffer periods of damaging underperformance. For investors whose own experiences and observations have led them to share these conclusions, ETFs are an ideal way forward.
