This strategy can easily be implemented using iShares' MSCI EAFE Index Fund (EFA), with an expense ratio of 0.35%, and iShares' MSCI Emerging Markets Index Fund (EMM), with an expense ratio of 0.75%. Both funds have small tracking errors relative to their respective funds.
A Caveat On Active ETF Strategies
Historic performances of the strategies discussed are the result of the length and amplitude of the business and market cycles that were encountered. Since the same cycles are unlikely to be repeated in the future, the results of using these strategies may or may not be similar.
Summary And Conclusions
In sum, an actively managed portfolio of ETFs based on popular indexes can produce risk-adjusted excess returns above those of its individual funds-positive alphas above specified benchmarks. This may be accomplished by understanding that business and market cycles persist for a period of time; different market segments benefit differently, and their stocks are valued accordingly. Random relative price fluctuations in these funds may be smoothed by averaging returns over an appropriate period in order to identify a discernable trend. Once identified, the trend can be exploited by acquiring the favored asset and liquidating the other throughout the cycle's duration.
