Enhancing Your Income Through Passives
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Enhancing your income through passives

In particular, from the point of view of being able to move quickly in and out of positions, using ETFs may be preferable to active strategies, which on the whole are structured as pooled vehicles that only price once a day.

This means if the fund prices at midday and you want to buy or sell at 1pm, you have to wait until the next day before you can trade. Whereas because ETFs trade whenever the market is open, like a regular share, you can make these switches whenever you see an opportunity. In the current environment, for example, if say President Trump announced a trade deal with China in the afternoon UK time, which creates an opportunity, then you can do something there and then. From a practical sense, it gives you a little bit more control.

Active certainly has a place

One thing to note though is that index construction for income tilted passives is, almost by definition, typically focused on historic metrics rather than forward looking predictions. Examples are screening for stocks with the highest dividend yield or stocks that have a track record of dividend growth over a defined period.

Active managers of income strategies will regularly have an allocation to “turn- around” stories, perhaps where they expect a company that has no history of paying dividends to start paying one.

Companies like this will generally not be captured by the index rules of an income tilted passive fund so opportunities may be missed, highlighting one of the many benefits of active management.

Creating the right mix

Investors should also not ignore the benefits of standard index trackers and their place in a fully diversified portfolio. These could be particularly useful in the wake of a global macro event, as it may be slightly clearer how the broader market indices might respond.

Furthermore, the UK equity market, historically, has a high dividend pay-out ratio and so income investors get a better yield from UK stocks generally. For that reason, just holding a FTSE tracker could generate much of the income you would need from a UK allocation.

Therefore, the savvy investor is likely to have a combination of active strategies, Smart Beta ETFs and traditional trackers. But investors have to be aware of whether the ETF or passive strategy they are using actually has all the exposure they are looking for and ensure that they understand any underlying biases that might affect their portfolio and the returns it can deliver.

 

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