Wednesday, April 4, 2018

2Q Rebalance - ETFG Dynamic Model Portfolios

Wednesday, April 4, 2018 - At the start of 1Q 2018, we wrote that investors came into the new year hoping for an instant replay of 2017, where the predominant fear was of being left behind as markets soared to new heights. Now fast forward to the start of 2Q 2018 and investor anxiety is indeed high but missing out on more gains isn’t what keeps investors awake at night as global markets continue to shudder. A positive close for last week surely has some bullish strategists pointing out that the S&P 500 was down only about 1% for the first quarter in its first quarterly loss since 2015, but that’s small comfort as the market continues to hug its 200-day moving average and where even high-flying tech stocks are falling back to earth.

Combining the start of a new quarter with the Easter and Passover holidays is seemingly so fortuitous even the Quants can’t overlook it. While some traders no doubt spent the long holiday weekend studying their charts and hoping for a better tomorrow,  the start of a new quarter means that it’s time to update the ETFG Dynamic Model Portfolios – the 4 “Base” portfolios and the 8 “Tilts” rebalanced on Monday. It’s no surprise that there were major changes, but it leaves us wondering if there are more tough times are ahead.

Three funds are leaving the domestic equity sleeve of the ETFG Dynamic Model Portfolios for the second quarter in a row, significantly shifting its underlying makeup. Leaving the portfolio are the SPDR Portfolio Small Cap ETF (SPSM), JPMorgan Diversified Return U.S. Small Cap Equity ETF (JPSE) and iShares Edge MSCI Multifactor USA ETF (LRGF) while the Direxion NASDAQ 100 Equal Weighted Fund (QQQE) remains in the line-up. Taking their places are the SPDR Portfolio S&P 500 Growth ETF (SPYG), SPDR Portfolio S&P 500 Value ETF (SPYV) and WisdomTree U.S. MidCap Dividend Fund (DON).

Replacing three funds that were only added in the first quarter might seem like a radical move, but there’s no denying that the markets have undergone a seismic shift in both sector and size leadership despite the S&P’s minor loss for the quarter. Our ETFG Quant model had us well positioned for higher volatility in the first quarter, shifting out of value names to more core positions while retaining a small/mid cap focus. We’re seeing another shift here at the start of the second quarter as the addition of SPYG and SPYV, whose ETFG Quant scores have been driven by a combination of momentum, high short interest and cheap fundamentals (relatively), gives the equity allocation a very different outlook. The broad sector make-up is largely unchanged but the portfolio now has a clear large cap focus at the expense of small-cap names which have almost entirely been eliminated from the allocation.

On the international side, the changes to the model’s international exposure were seemingly more modest at first glance with only two fund changes, the replacement of the PowerShares FTSE International Low Beta Equal Weight Fund (IDLB) with the iShares Core MSCI Pacific ETF (IPAC) while the Goldman Sachs ActiveBeta Emerging Markets Equity ETF (GEM) is replaced by iShares MSCI Emerging Markets ETF (EEM). Replacing IDLB with a more traditional index replicator is only part of the story since with the iShares MSCI Singapore Capped ETF (EWS) and iShares MSCI South Korea Capped (EWY) remain for another quarter, the international portion of the portion is very decidedly oriented towards Asia.

Despite the headlines focusing on a potential trade war with China, or any other nation we have a trade deficit with, numerous Asian equity funds have steadily outperformed their European alternatives over the last quarters as heightened volatility offers traders the opportunity to shine.  Australian and Japanese funds seem to be the favorite proxies for respective “risk-on” and “risk-off” plays but news reports that South Korea will be spared any tariffs have helped lift EWY, although perhaps the hope of avoiding a nuclear conflict is also a factor. Doesn’t that sound more like something we’d get excited about in 1962, not 2018?

You can find an overview and performance information for the ETF Global Dynamic Model Portfolios at

To learn more about our ETFG model portfolio strategy, please email us at or call us at (212) 223-ETFG (3834).

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