This trend can clearly be seen in our domestic allocation
, where the two funds with a large
cap orientation - the ALPS
Sector Dividend Dogs ETF (SDOG) and Invesco S&P 500 Pure Value ETF (RPV) - were
replaced by the First Trust Small Cap Core AlphaDEX Fund (FYX) and WisdomTree
U.S. SmallCap Fund (EES) ,
respectively. Both funds were strong performers, especially RPV , which handily outperformed the
Russell 1000 Value Index over the past three months. So why has the model shifted its favor to smaller-cap
In fact, the trend toward small-cap funds began some time ago, partly driven by their substantially higher fundamental scores relative to their larger peers. There’s no denying that the early stages of the COVID relief rally that began in late March favored larger stocks, with Apple, Amazon and Microsoft up from 32% to 50% in the last three months, pushing the price multiples for market-cap weighted, large-cap funds to new heights. The SPDR S&P 500 ETF (SPY) now trades with a trailing P/E ratio of 23.6x, in the upper third of its historical range
, while the iShares S&P
SmallCap 600 ETF (IJR) with a P/E of 14.93x, is close to the bottom of its own range.
Meanwhile, our ETFG Quant Behavioral scores have risen for smaller funds, thanks
an increase in momentum along with higher values for our contrarian sentiment
indicators. Smaller-cap focused funds clearly underperformed until mid-May, but
they began to outperform
their larger peers as investors shifted their focus to undervalued names, but
not “value” ones. Value, the style, has continued to underperform core and
growth funds and the Quant model has shifted away from value toward more “core”
The domestic allocation isn’t the only part of our strategy impacted by the Quant model
preference for smaller-cap funds ,
as both international sleeves have shifted toward funds
with a lower average market cap. This can be clearly seen in two funds joining
the allocation this quarter, the WisdomTree Japan SmallCap Dividend Fund (DFJ)
and iShares Edge MSCI Multifactor Intl ETF (INTF). Investors not familiar with
INTF, or suspicious of ETFs with ambiguous terms like “multifactor” in their
name, should know that its portfolio typically focuses on not just smaller
names, but those with a distinct bent toward the
value and quality factors.
Nor is the focus on smaller stocks the only change in the international developed sleeve
as a shift toward dollar hedged products becomes
more pronounced thanks to the addition of two new funds. First is the broad
iShares Currency Hedged MSCI EAFE Small-Cap ETF (HSCZ) as well as the iShares
Currency Hedged MSCI Germany ETF (HEWG). That shift might represent something
of a head scratcher as many are convinced that a substantial decline in the
U.S. dollar is imminent thanks to the explosion in the deficit and subsequent
record Treasury issuance, but our Quant model is focusing on hard numbers
instead. Specifically, that multiple hedged funds like HEWG are trading at
substantially lower price multiples compared to their unhedged counterparts,
making them much more attractive buys.
Finally, our emerging market allocation has been buffeted by the shift
toward smaller names with the addition
of WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) and First Trust
Emerging Markets Small Cap AlphaDEX Fund (FEMS) to the line-up. Both funds have
been strong performers in the last three months thanks i n part to a willingness to take a different approach
than the larger iShares MSCI Emerging Markets ETF (EEM.) EEM currently has over
40% of its portfolio invested in mainland Chinese names while DGS and FEMS are
both heavily overweighted in Taiwan where local stocks have been strong
performers thanks to the country’s ability to limit the spread of COVID-19.
To learn more about our ETFG Model Portfolio strategy, please email us at firstname.lastname@example.org 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
Thank you for reading the ETF Global Perspectives!
ETFG 21 Day Free Trial: https://www.etfg.com/signup/quick
Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. ETF Global LLC (“ETFG”) and its affiliates and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively ETFG Parties) do not guarantee the accuracy, completeness, adequacy or timeliness of any information, including ratings and rankings and are not responsible for errors and omissions or for the results obtained from the use of such information and ETFG Parties shall have no liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of such information. ETFG PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.
In no event shall ETFG Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the information contained in this document even if advised of the possibility of such damages.
ETFG ratings and rankings are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. ETFG ratings and rankings should not be relied on when making any investment or other business decision. ETFG’s opinions and analyses do not address the suitability of any security. ETFG does not act as a fiduciary or an investment advisor. While ETFG has obtained information from sources they believe to be reliable, ETFG does not perform an audit or undertake any duty of due diligence or independent verification of any information it receives.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income.