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TRADING STRATEGIES

As index trackers, Bips ETFs are often punted as long-term buy-and-hold instruments for investors with a relatively low risk appetite.

Bips ETFs can, however, be effectively used by more sophisticated investors who wish to actively trade entire markets.

Examples of some trading strategies are:

1. Active Management

Bips ETFs are the ideal tool for active managers to use for asset allocation. Managers are able to cost-efficiently trade entire markets and take advantage of intra-day price movements (for short-term trades) and low management fees (for a longer time horizon).

 

2. Shorting

As listed instruments, Bips ETFs can be short sold. In this way investors are able to take advantage of declining markets and profit from falling share prices.

While shorting can also be achieved using futures, the shorting of a cash security, like Bips ETFs, can be used as a financing transaction. Short selling generates a cash inflow for the seller which can be applied to other trading strategies, while shorting via futures has no corresponding cash inflow.

3. Core-Satellite Strategy

This strategy implies that investors hold the bulk of their investment in low-cost index trackers (the ‘core’), such as Bips ETFs, and use the remainder of their investment capital to follow other strategies to achieve alpha (the ‘satellite’). These other strategies can be hedge funds, individual equities and other asset classes, but the satellite can also be ETFs that provide differentiation from the core holding. This strategy results in significant cost saving, as the fees for index tracking (the bulk of the portfolio) are far lower than fees on actively managed funds.

 

4. Pair Trading

Pair trading is used by investors to trade the difference in price movement between two securities. As index trackers, Bips ETFs represent entire markets and can therefore be used to trade the difference between the movements in two markets.

A Pairs trade typically involves the sale (shorting) of one security and the purchase of another security. If the investor correctly predicts which security will go up and which will go down, a profit may be realised. The proceeds from the short sale may be used to finance the corresponding purchase and can result in a cash-neutral trade.

Pair trades can also be used to hedge against market risk when speculating on the price movement of a share. By purchasing the share and shorting a Bips ETF, a degree of market risk is removed from the trade. This type of trading does present some additional risks, however.