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Chapter 31. When to Choose an Alternativ... > Carrying Out Particular Strategies - Pg. 130

When to Choose an Alternative to Mutual Funds 130 One of the benefits of the managed account is the closer integration of the account with the client's overall investment approach. For example, if you own a significant number of shares of your em- ployer's company, the managed account can be structured to avoid this company. With a mutual fund, you might be buying an additional position in the company. Carrying Out Particular Strategies What if you as an investor have a reasonably conservative portfolio that you work hard to protect? You can use ETFs in various hedging strategies because you can easily assume a short position. Basically, hedging refers here to taking a position opposite your current one in an attempt to reduce the risk. For example, if you own a portfolio of stocks that you plan to continue to hold but you fear a sharp market correction and wish to protect yourself at least partially, you could assume a short position at the same time you continue to hold the portfolio of stocks. A short position is a bet that the market will go down. By shorting one or more ETFs, you would profit if the market went down sharply because the prices of the ETFs would also decline. You would then buy back the positions you shorted at a higher price and replace them, profiting by the difference in the two prices. It is possible to hedge sector, size, or industry exposure, and ETFs can be shorted on a downtick, unlike New York Stock Exchange stocks, thereby facilitating the taking of a short position at any time. ETFs would also allow this investor to take a flyer , or a speculative position on the market. The investor could make speculative bets on the market's returns or on the returns of specific seg- ments of the market with a small portion of the overall portfolio assets. ETFs allow investors to control sector exposure, which they might want to do as part of their overall portfolio strategy. By selling shares in the sectors that are overweighted and buying shares in the sectors that are underweighted, an investor can move much closer to some benchmark or desired goal. ETFs could also be used to fill a gap in a benchmark portfolio.