3Q Rebalance – ETF Global® Dynamic Model Portfolios

Tuesday, July 10, 2018 - Investor anxiety may have been running high at the end of the first quarter, the S&P 500 had dropped into the red and closed below its 200-day moving average, but ultimately those who stayed invested were well rewarded in the second quarter as the economic good news kept coming. Equities in general managed solid single digit returns that lifted markets above their starting line for 2018 although weakness in late June robbed them of some of their hard-won gains and new anxieties have emerged as we start the third quarter. Can the strong economic growth continue?  Will the incipient trade war grow out of control?

For us at ETF Global, the start of a new quarter means something much more concrete; that it’s time to revisit the ETFG Dynamic Model Portfolios. The 4 base portfolios and the 8 “tilts” were updated on July 2^nd and the wide performance differences between different sectors and style boxes are having a major impact on the models. Both the domestic and international sleeves saw significant changes with three funds leaving each with only the emerging market portfolio staying the same with both the iShares MSCI Emerging Markets ETF (EEM) and First Trust Chindia ETF (FNI) being retained for another quarter.

Among the domestic funds, only the Direxion NASDAQ 100 Equal Weighted Fund (QQQE) holds onto its spot in the line-up once again where it’s joined by the SPDR S&P 400 Mid Cap Value ETF (MDYV), the SPDR S&P 600 Small Cap Value ETF (SLYV), and the SPDR S&P 600 Small Cap ETF (SLY) while 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) depart the strategy. The result is the domestic portfolio has seen a substantial reduction in its average weighted market cap while the pendulum between value and growth has shifted towards the middle ground as financials gain more exposure at the expense of tech stocks.

The shift in the portfolio is easier to understand when you consider that large cap equities may have struggled to hold onto their gains last quarter, but their small-cap brethren had no such issues with SLY up over 9% while the iShares Russell 2000 ETF (IWM) was up nearly 8%. That strong momentum was one of the driving forces that propelled a number of funds focused on smaller names up our list of top Quant funds although we should note that all four of the domestic funds have excellent fundamental scores as well. In fact, while the three additions to the portfolio have seen an increase in short-term momentum which lifted their aggregate score, their sentiment scores were substantially higher with each having high implied volatility and short interest. Compare that with SPYG and SPYV which have seen a steady drop in their behavioral scores as large caps continue to lose ground to smaller names.

U.S. equities generally had a solid quarter, the winners on the international side in the second quarter were those were those who lost the least as emerging market stocks continued to be hit by Fed fears while trade war talk hurt even the developed markets. That helped drive a major shift in the international side of the portfolio as it reduced Asian exposure to a more European orientation thanks to the departure of the two broad funds, the iShares Core MSCI Pacific ETF (IPAC) and iShares Edge MSCI Multifactor Intl ETF (INTF) along with one of the country specific funds, the iShares MSCI Singapore ETF (EWS). Taking their place are the iShares Core MSCI International Developed Markets ETF (IDEV) and Goldman Sachs Active Beta International Equity ETF (GSIE) along with the iShares MSCI United Kingdom Fund (EWU) where the Brexit debate continues to weigh on valuations while helping boost its sentiment scores.

You can find an overview and performance information for the ETF Global Dynamic Model Portfolios at http://www.etfg.com/about-model-portfolios

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