By Paul Weisbruch of Street One Financial
ETF investors -- retail and institutional -- as well as investment advisers using exchange-traded funds in their client portfolios likely use portfolio-rebalancing periodically. Some advisers prefer to weight their client portfolios to favor value over growth and then rebalance the portfolios to bring their weightings in line with their original targets.
One simplistic example is an adviser who uses a 60-40 value-to-growth split in client portfolios and rebalances once per year in December. If during the following year value stocks are in vogue in the market, this 60% value to 40% growth could look like 70-30 or even 80-20. That is because some stocks, or ETFs, will rise in value, others will fall, some will remain stagnant and the original "model weightings" will rarely be in line with the initial targets after market forces go to work and take over. Thus, a rebalance may consist of taking profits on those holdings that have run the furthest and reinvesting those profits by buying more shares of those holdings in the portfolio that underperformed.
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