Tuesday, October 2, 2018

4Q 2018 Rebalance – ETF Global® Dynamic Model Portfolios

Tuesday, October 2, 2018 - This summer may have been dominated by the three “T’s” of tariffs, trade wars and Trump, but if you only studied the markets you’d be hard put to tell anything was amiss as investors who heeded that sage advice to “sell in May and go away” were once again disappointed. Strong performance by Large-Cap names in the industrials, healthcare and technology sectors helped lift the S&P 500 to new heights as the index closes in on the 3,000 mark, but stocks might have caught an early chill as September closed out on a weak note. The most visible culprits might be interest rate sensitive financials and utilities, but weak showings by Alphabet (GOOG, GOOGL) and Facebook (FB) along with a flat return for Amazon (AMZN) once again confirm the dangers of a market-cap weighted index in the late stages of a bull market.

Perhaps that’s why our ETFG Dynamic Model Portfolios continue to favor equally-weighted and Small-Cap funds in the most recent reconstitution which was completed on October 1st. All 4 of the base portfolios and the 8 “tilts” were updated and for the first time in recent memory, the domestic sleeve of the portfolio remains relatively static with only minor changes to the positioning of the funds without impacting their overall makeup. All four of the funds from the third quarter allocation, the Direxion NASDAQ 100 Equal Weighted Fund (QQQE), 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) return for another quarter with QQQE holding onto its top spot in the line-up once again. The only significant change was a shift towards more Small-Cap exposure with MDYV’s weight in the portfolio dropping as higher sentiment scores raised SLY and SLYV’s overall ETFG Quant scores.

While U.S. equities (and our domestic sleeve) may have been a sea of calm in the third quarter, international ETFs continued to struggle despite a seesawing dollar. But while international funds as a whole may have underperformed, the dynamics of individual markets and currencies mean there were several bright spots for discerning investors as certain funds did quite well including iShares MSCI South Korea ETF (EWY) along with a number of Asian funds including iShares MSCI Japan (EWJ) and iShares MSCI Taiwan (EWT) although the biggest winner for the quarter was the iShares MSCI Poland ETF (EPOL) up over 9.5%!  The key criteria for their success seems to come down to the third of our “T” factors, President Trump, as all four are considered increasingly important U.S. allies in the burgeoning trade war.

That trade war may explain the on-going shift in the international, developed sleeve as three of the four funds left after the end of the quarter with only EWY remaining in the program. The new funds in the allocation give it a decidedly European flair thanks to the addition of the SPDR STOXX Europe 50 ETF (FEU) along with the iShares MSCI Italy ETF (EWI), which has suffered over the last few months as their new government, led by the Five Star Movement, enacts a more populist agenda at odds with the E.U.’s focus on balanced budgets. The net result is likely to be more short-term pain, although the high sentiment and fundamental scores could add more fuel to the fire of an eventual rally, if the Italian government’s deficit spending plans help ignite a period of stronger growth much as it has here in the U.S.

Finally, our emerging markets allocation also saw noticeable changes as the iShares MSCI Emerging Markets ETF (EEM) was replaced by the iShares Latin America 40 ETF (ILF), which offers a more direct approach to two of the better performing markets over the last quarter, Brazil and Mexico. Whether that performance continues is likely going to be driven by politics, including the winner of the upcoming Brazilian election, although recent polling suggests that voting will likely extend to a second round. That could create more volatility and opportunities, as the situation develops in October.

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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