"We see more investors using ETFs to diversify into different types of credit exposure, like high-yield bonds, and many are also starting to look at preferred securities, which are generally less risky than common stock but often more high risk than fixed-income securities," said Jane Leung, an iShares asset allocation strategist for BlackRock, noting preferred stocks also provide diversification benefits, as they are less correlated with the broader market.
"Investors are using tactical allocation to express their market views," she said.
The growing demand for outcome-oriented strategies, in fact, has given rise to a new breed of asset manager, called ETF investment strategists, who typically work with financial advisors to help clients maximize returns and minimize risk in their ETF portfolios. In effect, they are ETF funds of ETFs.
"ETFs allow investors to reach out and gain exposure to particular asset classes, like emerging or frontier markets, in a low-cost diversified fund," said Jared Watts, portfolio manager for Morningstar Investment Management, an ETF strategist.
According to fund tracker Morningstar, some 1,800 U.S.-listed ETF products exist, deploying everything from diversified core holdings to inverse, or hedge fund–like strategies. Many use a combination of strategies, and not all are appropriate for retail investors, Watts said.