How we select ETF

How we select ETF

Busnelli & Associati considers ETFs an essential tool for the correct diversification and efficiency of the portfolio.

ETF is the acronym for Exchange Traded Fund, a term with which we identify a particular type of investment fund with three main characteristics:

it is traded on the Stock Exchange like a stock or bond, so unlike other funds it can be traded at any time during the opening hours of the Stock Exchange where it is listed.
its only investment objective is to replicate the index to which it refers (benchmark) through a totally passive management.
has very low costs.
ETFs are distinguished primarily on the basis of the benchmark they replicate. In this perspective, there is a distinction between monetary, bond, equity, commodity, real estate and structured ETFs.

For example, if an ETF replicates the FTSE MIB index (Italian stock market index), it will be considered an equity ETF on the Italian market. Investing in this ETF is equivalent to investing in all the companies listed on the Italian stock market.

Busnelli & Associati uses a precise and detailed method for the selection of each ETF.

The first step is to understand the client’s needs, i.e. the degree of risk-return that he is willing to accept, the way in which he will use the income earned and the time frame of his investment.

For example, if the client only wishes to protect his capital from inflation and possible losses and has a short-term time frame, Busnelli & Associati recommends opting for inflation-indexed bond ETFs, government or corporate ETFs with a high credit rating (investment grade). On the contrary, if the client desires a higher yield and has a medium-long term perspective, the portfolio will be composed in good part by high yield corporate bond ETFs, government and corporate bond ETFs of Emerging Countries, real estate ETFs, commodities ETFs and equity ETFs. For more aggressive clients, it is also possible to invest in leveraged ETFs that provide multiples in return (or loss) based on movements in the underlying index, or short ETFs that go up when the market goes down and vice versa.

At the same time, should the client require a steady coupon flow that allows him to pay liabilities with a certain frequency, the portfolio in question will be composed of distribution ETFs that can ensure periodic income. Otherwise, one can opt for accumulation ETFs, which reinvest the profits generated.

Once the client profile has been identified, the ETFs are identified following a detailed macroeconomic analysis, with particular focus on the monetary policies of the Central Banks and a scrupulous sector analysis of the companies in question.

The monetary policies of the Central Banks play an essential role in determining the interest rates of the economy and consequently substantially influence the growth of the economy. During a rising interest rate phase, bond ETFs with a low duration will be preferred (usually high yield bond ETFs), so as not to be overly exposed to price risk. On the contrary during a downward phase of interest rates, the portfolio is essentially made up of fixed rate bonds with a higher duration (usually investment grade bond ETFs).  Generally, an economy with low interest rates is favorable for the stock market, as companies have access to cheap credit. In this situation, the portion of equity ETFs will be increased while in the case of an economy with rising interest rates, this portion will be reduced.

As far as sector analysis is concerned, Busnelli & Associati focuses on sectors with large growth margins and excellent structural margins, such as artificial intelligence, cybersecurity or cloud computing. This analysis allows to select ETFs that contain companies that are leaders in the market in which they operate and that will continue to be so in the years to come thanks to a structure and an operating model capable of ensuring sustainable and profitable growth over time.

The method developed by Busnelli & Associati guarantees the client to invest in ETFs with the best risk-return ratio and with the knowledge that the proposed investments correspond to his own financial objectives.

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