2Q 2019 Rebalance – ETF Global® Dynamic Model Portfolios

Tuesday, April 2, 2019 - With the first quarter of 2019 officially in the history books, investors are increasingly concerned with on which side of this historic rally they sit. It may appear that equities had more gas in the tank thanks to a quick start to the year with a V-shaped rally that helped them reclaim most of their 4^th quarter losses, but most of the gains came in January with the markets since showing signs of increasing fatigue. In fact, the S&P 500 remains more than 3% below it’s peak of 2,939 and now investors have another red flag to worry about with a short-lived inversion of the yield curve, at least as measured using the 3 month and 10-year Treasury yield. Could this foreshadow when the rally will finally fail or does the hope of a more permissive Fed signal better times ahead?

Patient investors will have to wait for time to answer that question, but the quarterly reallocation of our ETFG Dynamic Model Portfolios, with all 4 base portfolios and the 8 “tilts” were updated on April 1^st.  The recent upheaval in the markets has led to a major shift in the models positioning. First is the domestic sleeve where the more balanced and growth-oriented names have been replaced by value funds.

Leaving the strategy are the iShares Russell Midcap ETF (IWR) and the SPDR Portfolio S&P 500 Growth ETF (SPYG) while the Direxion NASDAQ 100 Equal Weighted Fund (QQQE), and the SPDR S&P 600 Small Cap ETF (SLY) remain in the strategy for another quarter. Joining them will be two frequent fliers, the SPDR S&P 400 Mid Cap Value ETF (MDYV) and the SPDR S&P 600 Small Cap Value ETF (SLYV) which you may think will give the strategy a distinct leaning towards both smaller and bank stocks, but you would only be half right. While the Fed’s recent decision to hit the pause button on further rate hikes has brought significant short-term pain to bank shares, the two value funds joining the line-up have slightly-below average financial exposure compared to other funds in the value space. When working with a more balanced small-cap fund and an equally-weighted NASDAQ 100 ETF, the overall impact is only a slight overweight to financials compared to the broader market.

Our international equity exposure however is a different story where our Quant models are swapping out all four of the developed international funds this quarter with the strategy taking on a more core feel. Joining the allocation are two broad funds from Schwab, the Schwab Fundamental International Large Company Index (FNDF) and its small cap equivalent, FNDC. Two country-specific funds, the iShares MSCI funds for Singapore (EWS) and Spain (EWP) also join the lineup. Although the model has often favored Europe over other parts of the EAFE arena, we were surprised by the strong scores for more broad-based funds this quarter, which will provide this sleeve of the portfolio with more diversification. We were less surprised to see the departure of the iShares MSCI United Kingdom fund (EWU) whose presence tends to ebb and flow with the latest Brexit drama, although we should point out that the fund solidly outperformed most Eurozone country specific funds in the 1^st quarter.

Finally, the emerging market sleeve also saw changes as the broader iShares MSCI Emerging Markets ETF (EEM) joined the program while the iShares MSCI Mexico ETF (EWW) was dropped from the model while the First Trust Chindia Fund (FNI) remains. It was a strong quarter for Chinese stocks with A-share funds strongly outperforming their Hong King equivalents as investors hoped for an end to the trade war. While they were disappointed in the first quarter, political concerns heading into an election year might be enough to force the President’s hand into coming to terms on even a modest proposal to restore the old order.

To learn more about our ETFG Model Portfolio strategy, please email us at sales@etfg.com or call us at (212) 223-ETFG (3834).

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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