Tuesday, April 7, 2020

2Q 2020 Rebalance - ETF Global Dynamic Model Portfolios

Tuesday, April 7, 2020 - Investors began 2020 hoping for more of the same, as they celebrated one of the best years on record. Now, they would be grateful if this year would just end without another shattering rout that draws comparisons to the Great Depression. Equity indices ended what was either the worst first quarter in their history or the worst quarter since 2008 - so who can blame investors for running for cover with no end to the pandemonium in sight anytime soon?  With only Treasuries and gold seemingly escaping the chaos, where can investors turn now?

While the world and global markets may be in crisis, the show must go on. Specifically, the 2nd quarter update of our ETFG Dynamic Model Portfolios, including all 4 of the base portfolios and the 8 “tilts” which were updated on April 6th.  Given the sudden, almost violent shift in investor sentiment, it’s hardly surprising that our ETFG Quant model has made significant changes this quarter with a nearly universal shift towards value and low volatility products across nearly all equity positions.

Beginning with our domestic allocation, the market rout helped drive the fundamental ETFG Quant scores for already cheap value funds even higher, making them too good for the Quant model to pass up. The allocation this quarter is split evenly between large and small cap funds with three having an explicit focus on value stocks. Those three, the Invesco S&P 500 Pure Value ETF (RPV), the iShares S&P Small-Cap 600 Value ETF (IJS) and ALPS Sector Dividend Dogs ETF (SDOG) are joined by just one “core” fund, the iShares Core S&P Small-Cap ETF (IJR.)

That creates a domestic allocation with a significantly lower average market capitalization than the S&P 500 or Dow Jones, although its sector weightings aren’t that far off from the broader market. What it does have going for it is a substantially higher yield, both in terms of dividends and earnings (the inverse of the P/E ratio). All four funds are trading at close to their lowest price multiples. SDOG is an excellent case in point with its P/E and P/B scores near all-time lows and with a dividend yield, currently over 5%, close to an all-time high!

Change has also come to our international allocation with a shift to lower volatility names such as the Invesco S&P International Developed Low Volatility ETF (IDLV) while the equity exposure also shifts further east with the addition of two Asian-Pacific funds. Although the First Trust Asia Pacific ex-Japan AlphaDEX Fund (FPA) is broad-based, it has a substantial allocation to South Korea which is well represented in the portfolio thanks to the country specific fund, iShares MSCI South Korea ETF (EWY) that carries over from the prior quarter. Despite the provocativeness of their kin to the north, South Korean equities have been relatively calm thanks to the aggressive measures taken to control the spread of COVID-19, with EWY performing in-line with U.S. equities and outperforming other international developed markets.

Our EM allocation is also seeing a significant shift as the Invesco S&P Emerging Markets Low Volatility ETF (EELV) joins the allocation, while the First Trust Chindia Fund (FNI) is replaced by iShares China Large-Cap ETF (FXI.) It’s been anything but smooth sailing in emerging markets although mainland China “seems” to be maintaining its role as a relative sea of calm for now. While COVID-19 may have originated in the country, its quick response or, more likely, the promise of financial largesse made Chinese A-shares among the best performers in 2020 with FXI up 2.19% last week. What helps make EELV ‘low vol’ is the fact that it has exposure not just to those calm mainland Chinese stocks but a 30% allocation to Taiwan, another success story in managing the COVID-19 outbreak.

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

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