Wednesday, July 3, 2019

3Q Rebalance - ETF Global Dynamic Model Portfolios

Wednesday, July 3, 2019 - Another quarter down and investors (and the Federal Reserve) are still wondering which way this thing is going and whether it’s time to start taking some chips off the table.  On the one hand, investors suffered through a minor pullback by equities in May only to see them immediately bounce back to old highs in June even as the ten-year Treasury bond yield fell below that of the three month note. And the less said about the burgeoning trade war with China the better, yet, equities have proved remarkably resilient throughout all of this with enough IPO and merger mania to have investors wondering if the market is partying like it’s 1999 all over again.

Investors will have to wait for the next employment report to shed some light on where the market is going, but, the quarterly reallocation of our ETFG Dynamic Model Portfolios waits for no one as all 4 of the base portfolios and the 8 “tilts” were updated on July 1st and the back and forth nature of this market has left value funds firmly entrenched within domestic sleeve.

The fund line-up for the third quarter is a mix of old and new favorites with only one fund, the SPDR S&P 600 Small Cap Value ETF (SLYV) remaining for another quarter. Leaving the strategy are the Direxion NASDAQ 100 Equal Weighted Fund (QQQE), the SPDR S&P 600 Small Cap ETF (SLY) and the SPDR S&P 400 Mid Cap Value ETF (MDYV.)  Taking their places are several familiar names including the iShares Russell Midcap ETF (IWR) and the SPDR Portfolio S&P 500 Growth ETF (SPYG) with the WisdomTree U.S. SmallCap Dividend Fund (DES) also joining the fund.

Even though the second and third quarter domestic allocations might have similar sounding names, there are substantial differences with the model showing a clear preference for larger stocks with a substantial increase in bigger names thanks to the addition of SPYG which has a larger average market cap than QQQE. But under the hood, the sector breakdown between the two quarterly allocations remains relatively stable as the back and forth trading over the last few months hasn’t substantially altered the sector leadership so far.

The international equity exposure remains largely unchanged from the prior quarter as our ETFG Quant Model continues to favor two broad funds from Schwab, the Schwab Fundamental International Large Company Index (FNDF) and its small cap equivalent, FNDC. Not surprisingly, the model also favors the return of one of our on-again, off-again positions, the iShares MSCI United Kingdom fund (EWU) whose presence depends on the latest Brexit drama. EWU was in the program as recently as the first quarter and fortunately the model favored replacing it just before the last twist in the saga as PM Theresa May’s failure to pass her long-negotiated deal led to her resignation and a race to replace her. EWU was relatively flat in the 2nd quarter despite heavy volatility, although the iShares MSCI Eurozone ETF was up over 5%.

The emerging market sleeve also saw its share of turnover this quarter as the iShares MSCI Emerging Markets ETF (EEM) was replaced by the iShares Edge MSCI Multifactor Emerging Markets ETF (EMGF) model while the First Trust Chindia Fund (FNI) remains.  Exactly what factors is the fund looking for?  According to the iShares website, it has a focus on more inexpensive and financially healthy smaller stocks with better momentum.  That gives the fund a substantially different make-up than EEM, with a smaller overall market cap and with a distinct bent towards value stocks. So, like the domestic allocation, the EM portion of the portfolio is looking for a bargain!

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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