Rebalancing strategies for your ETF portfolio

It is crucial to rebalance your portfolio on a regular basis. With all the different types of rebalancing strategies that are used by the investors. In this article, we will cover two constant-mix strategies: percentage-of-portfolio rebalancing and calendar rebalancing.

Percentage-of-portfolio Rebalancing Strategy

This rebalancing strategy focuses on keeping the same desired percentage composition of your portfolio. Once the asset percentage is lower or higher the desired range, the rebalancing activities must be scheduled. By rebalancing we mean the process of selling the asses which is above the desired percentage and buying the asset which is below the desired percentage.

For example, the allocation strategy for your portfolio could have a following set-up of 40% ETF 1, 20% ETF 2, and 40% in bonds. It can also allow a fluctuation +/- 5% for each of the portfolio components. In other words, ETF 1 and ETF 2 could both balance between 35% and 25%, leaving 35% to 45% of the portfolio allocated to bonds. Only when any of the portfolio assets moves outside the set up limits, we need to rebalance the entire portfolio. That way it meets the initial allocation.

Calendar Rebalancing Strategy

This strategy includes analyzing your portfolio at a predefined periods and rebalancing it to meet the original allocation goals. Typically, this happens on monthly or quarterly basis, as more frequent rebalancing activities can be too expensive, while less frequent reviews can be not sufficient.

Please note that the decision on both frequency of rebalancing and percentage composition of your portfolio depends on the individual characteristics of your assets. The three main factors to keep in mind are transaction cost, price volatility and correlation with other portfolio assets.