​Asset Allocation

Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve. - Talmud Circa 1200 B.C – 500 A.D.

Diversification is not a new idea. In fact this Talmud quote is approximately 2,000 years old. Today diversifying one’s investment portfolio is known as asset allocation, which is the act of apportioning investment funds among different asset categories to diversify exposure to any single asset class. 

Different types of asset classes perform differently from one another during different time periods. In other words, they are non-correlated.

Asset allocation involves dividing an investment portfolio over different types of asset classes, such as stock, bonds and cash to help reduce risk.

Certain types of asset classes offer higher return potential but carry more risk; equities are more volatile than fixed income securities, but historically have provided higher returns. Fixed income securities offer more stability, but lower return potential.

Your asset allocation strategy can be aggressive, conservative, or somewhere in between and should be based on your individual investment goals, time horizon, and risk tolerance.

About ETFs/ETNs

An Exchange Traded Fund is an investment product that allows an investor to buy and sell shares in a single security that represents a fractional ownership of a portfolio of securities. ETFs hold a basket of securities and are typically designed to replicate the performance of an established index. 

An Exchange Traded Note is a common name for a senior unsecured debt obligation designed to track the total return of an underlying market index or other benchmark.

Features of ETFs/ETNs

Diversification – ETFs/ETNs can provide broad asset class exposure and offer index-like diversification

Liquidity – Listed on national exchanges, ETFs/ETNs can be bought and sold like common stocks throughout the trading day. 

Transparency – Inherently transparent, ETF/ETN holdings are published daily, allowing investors to view their exposure to any particular security or asset class and how those holdings are weighted.

ETF & ETN Risk Information

The ETF shares purchased for clients using the Strategic Model Portfolios represent an interest in a portfolio of securities that track an underlying benchmark or index. Unlike traditional mutual funds, shares of ETFs typically trade throughout the day on a securities exchange at prices established by the market. There are risks associated with ETFs. One of the risks is tracking error. Tracking error, which may be negative or positive, is a measure of how closely a portfolio follows the index which it is intended to track. Tracking error may occur because it may not be possible to buy all the securities of an index. Tracking error may also occur as a result of diversification constraints, as ETFs typically aren’t allowed to invest more than a set percentage of assets in a single security. Tracking error may also occur because some ETFs require cash holdings to buy and sell securities. 

ETNs are structured products that are issued as unsecured debt securities by financial institutions that generally trade daily on stock exchanges and track the performance of various assets, indexes and strategies, typically covering commodities, currencies and emerging markets. ETNs have maturity dates, at which time the issuer makes a payment based on the performance of the underlying asset, index or strategy, less fees. ETNs may also be sold on an exchange prior to maturity at the current market price. ETNs are backed by the credit of the issuer. There are risks associated with ETNs. One of the risks is credit risk, which is the risk that the institution that issues the ETN will default on the note. Also, credit ratings of the issuer are subject to change. If the issuer’s credit rating is downgraded, there will likely be a negative impact on the price of the ETN. ETNs are also subject to interest rate risk, which is the risk that the value ETN can fall if interest rates increase. ETNs are subject to inflation risk, which is the risk that the value of any income will be eroded as inflation shrinks the value of the payments. ETNs are also subject to call risk; the issuer of the ETN may force the ETN holder to redeem it before maturity, in which case payment will be made in accordance with the call provision in the ETN. Other risks associated with some ETNs are lack of liquidity, lack of trading volume, and the risk that if the trading market for the security does not develop, the issuer will delist the security. 

Specific risks with the underlying securities in the ETFs and ETNs that will be purchased in client accounts include the following:

Risks associated with REITs include fluctuations in the value of real estate, extended vacancies and uninsured damage losses from natural disasters.

Risks associated with emerging market securities include but are not limited to market and currency volatility, adverse social and political developments, and the relatively small size and reduced liquidity of these markets.

International investing involves risks that include currency fluctuations, economic and political instability and different accounting standards.

Companies with small capitalization have the potential for greater volatility than companies with large capitalization and may experience more significant growth and failure rates than large-cap companies. Small-cap companies may also experience limited trading volume and frequency.

Investing in medium-sized companies involves greater risk than is customarily associated with more established companies. Stocks of such companies may be subject to more abrupt or erratic price movements than larger company securities. Such companies usually do not pay significant dividends that could cushion returns in a falling market.

The following additional risks are associated with municipal securities and/or securities that are linked to prices of commodities:

Risks associated with municipal securities are interest rate risk (as interest rates rise bond prices usually fall); the risk of issuer default; and inflation risk. Also, the municipal market can be affected by adverse tax, legislative or political changes and changes in the financial condition of the issuers that could have a significant effect on an issuer’s ability to make payments of principal and/or interest.

Risks associated with securities that are designed to track the performance of a commodity index include commodity market and index risk. Commodity futures prices may change unpredictably, which will affect the value of the index components, and consequently the value of the underlying security, in unforeseeable ways. Trading in commodities and commodity futures is speculative and can be extremely volatile. In the event of a market disruption, the index publisher may suspend or discontinue the calculation of publication of the index, making it difficult to determine the market value of the index, which may in turn, adversely affect the market price of the security.