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Educationwealth-architecture

ETF Strategies: The Institutional Portfolio

You are reading Lesson 1 of the wealth-architecture course.

1. The Core & Satellite Approach

Do not gamble with your life savings. Professional portfolios are built on two distinct layers.

The Core (80% Allocation)

This is your boring, low-cost foundation. It tracks broad beta (the market). It should be globally diversified.

  • Example: 60% Total World Stock (VT) + 20% Total Bond Market (BND).
  • Goal: Capture the global equity risk premium cheaply.

The Satellite (20% Allocation)

This is where you generate Alpha (outperformance). You use this portion to make tactical bets based on the macro environment.

  • Example: Buying an Energy Sector ETF (XLE) because oil prices are rising.
  • Example: Buying a Cybersecurity ETF (CIBR) because of geopolitical tensions.

2. Factor Investing (Smart Beta)

Standard ETFs like SPY are 'Market Cap Weighted'—the biggest companies get the most money. This is inefficient. Smart Beta ETFs weight stocks based on Factors:

  • Value Factor: Cheap stocks relative to earnings (e.g., VTV). Outperforms in high-inflation environments.
  • Momentum Factor: Stocks that are already going up (e.g., MTUM). Outperforms in strong bull markets.
  • Quality Factor: Profitable companies with low debt (e.g., QUAL). The safest play during a recession.

Strategy: Tilt your 'Core' portfolio towards Value when inflation is high, and Momentum when the Fed is cutting rates.

3. Hedging with Inverse ETFs

When the market crashes, most investors panic sell, triggering tax events. Professionals Hedge.

The Inverse ETF

Inverse ETFs (like SH - Short S&P 500) go UP when the market goes DOWN.

  • Scenario: The S&P 500 breaks a major support level.
  • Action: Instead of selling your long-term portfolio, you buy a 10% position in a 2x Bear ETF (like SDS).
  • Result: The gains from the short ETF offset the losses in your long portfolio. When the market stabilizes, you sell the hedge.

4. The Trap of Thematic ETFs

Be careful with 'narrative' ETFs (e.g., Cannabis, 3D Printing, Space Travel). These often launch at the peak of a hype cycle.

  • Rule: Never buy a thematic ETF just because the news is talking about it. The smart money has already front-run the launch. Only buy themes after a 50% drawdown when the tourists have left.

Conclusion: Be Your Own Fund Manager

You do not need a wealth manager charging 1% AUM. By combining a low-cost Core with tactical Factor Satellites, you can replicate institutional performance with total liquidity and zero lock-up periods.

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