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The ETF Book: All You Need to Know About Exchange-Traded Funds, Updated Edition by Richard A. Ferri

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CHAPTER 19

Active Portfolio Management with ETFs

Active portfolio management using exchange-traded funds (ETFs) is a strategy of selecting funds for a portfolio with the intent to outperform a market benchmark. Active portfolio strategies are in stark contrast to the passive strategies discussed in previous chapters where ETFs are selected that have the objective to achieve returns close to the benchmark.

Active portfolio management remains the dominant method of investment selection in the financial markets today. That is ironic since the scorecard between the active strategies and passive strategies clearly favors passive methods. It is very difficult to outperform benchmark indexes. Even so, a large number of investors have the undying belief that one day they eventually will find an active method that consistently generates superior results.

There are literally millions of ways that investors can use ETFs in an actively managed portfolio, and it is not possible to discuss all those methods in these few pages. However, I have attempted to group several of them into a few basic categories.

The four active management strategies discussed in this chapter are: top down, bottom up, momentum, and technical. Top-down analysis starts with an examination of the global economic outlook when deciding on which ETFs to purchase. Bottom-up methods focus on detecting the quality of earnings in an industry to decide which have the most value. Momentum investors buy ETFs that have had high ...

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