2015 is going to be remembered largely as the year of the “FANGs” but for money managers running strategic allocation strategies, it was a true “Annus Horribilis” where it seemed that no matter which way you twisted and turned, literally nothing worked. Amazon and Google may have helped large growth funds stay in the black but only dividends kept their large blend brethren from ending the year in the red like the rest of the style boxes. Investors who turned to international equities had to play a smart game of picking the right market and currencies as Ireland and Denmark outperformed even hedged European equities. And while forecasts of more doom and gloom seem to be the order of the day, the ETFG Quant Movers report seems to suggest that investors and their Advisors are continuing to shift to smart beta and defensive favorites hoping to get the best of both worlds in 2016.
Many familiar names keep turning up in our weekly behavioral quant score reports. This week was no exception with the PowerShares S&P 500 Low Volatility Portfolio (SPLV), which saw its behavioral score surge over 30% last week thanks to strong price momentum that put the fund into the 10 highest rankings funds while its closest rival, the iShares MSCI USA Minimum Volatility fund (USMV) languished 300 spots further down the list. It’s not hard to see why the fund has surged to the top of the list after it handily outperformed the S&P 500 TR by close to 300 bps last year while suffering only a fraction of the downside in August’s rout. That alone makes the fund an easy choice for shell-shocked Advisors with clients who still want all the imagined upside with none of the potential downside and which would also explain the $550 million in positive inflows the fund recorded in December.
But why are they going to give all their love to SPLV while USM, which performed even better last year, is being treated like the ugly stepsister? USMV and SPLV may have similar names but very different portfolios with SPLV having a value oriented approach compared to USMV’s more giant-cap allocation that leans more towards growth thanks to a heavy weighting to tech and healthcare names that gave it some extra “umph” in 2015. In fact USMV, which is reconstituted twice a year, currently has two of the four FANGS while SPLV not only is missing all four but currently has a 0% weighting to highflying tech and lowly energy stocks. Instead the fund has a heavy allocation to consumer staples names including Clorox and industrial favorites like Waste Management that historically have done better in bear markets thanks to steady dividends and more consistent earnings growth and SPLV isn’t the only fund to benefit from this trend.
Two other funds with heavy consumer staples allocations made our list of top behavioral movers last week include the Vanguard Dividend Appreciation ETF (VIG) and the Schwab U.S. Dividend Equity ETF (SCHD.) That positioning appeals to investors looking to get away from the 21st centuries answer to the Nifty Fifty but before you rush out to add SPLV to your portfolio; remember that kind of success tends to create its own problems and for SPLV it’s one of valuations as the fund currently has the lowest fundamental score of any product currently tracked by ETF Global thanks to price multiples scores close to record highs.
Investing on fundamentals is a tough game and better suited to investors with a more long-term orientation and even then it might require a cast iron stomach to hit that buy button although our Fundamental Score movers report shows a few brave souls have been diving in the bargain bin. The bottom of the value heap continues to be dominated by high yield MLP and other energy funds but international funds that were badly stung in 2015 by the rising dollar are slowing beginning to climb their way out of the deep value hole as investor’s debate how much more upside potential the dollar might have in 2016. No clear or consistent pattern was readily transparent last week although there seemed to be a clear preference among investors for Asian equities with little to no Japanese exposure like the iShares Asia/Pacific Dividend ETF (DVYA), the WisdomTree Asia Pacific ex-Japan Fund (AXJL) and the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) making the short list for biggest absolute drop. Switching to the largest percentage drop brings up an entirely different list of products although the international flavor continues to predominate led by the SPDR S&P International Consumer Staples Sector ETF (IPS) that seems to combine the best of both worlds with inverse dollar and consumer staples exposure although being a somewhat thinly traded fund might limit its usefulness as an indicator. Investors looking for a double whammy should remain cautious of IPS for other reasons however as it ranks just behind SPLV with the second lowest fundamental score of any fund currently tracked by ETF Global!
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