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 email@example.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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