FlexShares are designed to help investors pursue specific investment goals, by blending intelligent portfolio construction principles (to pursue targeted outcomes), with passive management (to contain costs). But how, exactly, does this work?
Designing an Index
The true work of portfolio engineering occurs before establishing a FlexShares ETF and its underlying benchmark index. After a desired universe of securities is identified, the index is adjusted to address investor objectives ranging from liquidity to tax consequences, then stress-tested. Rules are established to standardize when the portfolio is rebalanced, how the index is adjusted and how to address extraordinary situations such as a market crisis.
Three investor-focused concerns drove FlexShares development:
Investors recognition that traditional indexing options often hold biases that may not fit their goals or risk preferences.
Shifting sentiments by investors away from active asset management in recent years.
Investors increasing desire for customized investment solutions to meet their goals, such as:
- Better performance,
- Pursuing yield,
- Limiting risk,
- Flexibility to adjust portfolios for unique needs, or
- Any combination of the above.
Though FlexShares ETFs are intended to help investors target such goals, there is no guarantee of achieving them.
Developing an Appropriate Strategy
In modern investing parlance, the performance of the market is known as beta. Beta is a statistical measure of the volatility, or sensitivity, of rates of return on a portfolio or security compared to a market index. Investors aiming to match the markets beta face headwinds including trading costs, tracking error, possible tax liabilities and the presence of competing beta that is, one index may fall, but a different, yet similar, index may rise at the same time. Investors striving to beat beta (that is, achieve alpha) also face the reality that pursuing alpha in traditional investing means carrying more risk.
The challenge is to survey the spectrum of investment options and determine which beta is appropriate for an individual investors investment goals, risk tolerance, diversification needs, tax management, yield profile and more all of which is inherent in developing an appropriate portfolio strategy.
An Intelligent Approach
By combining intelligent portfolio construction with the efficiencies of indexing, FlexShares strategies seek to avoid both the challenges of active management (including costs, risk and portfolio turnover), and the limitations of indexing (whereby allocations may not meet investors' aims).
New to ETF Investing?
The links to the left provide access to information to help investors who are new to ETFs. Its important to consult with your financial professional about how ETFs can fit into your portfolio strategy.