Wednesday, October 14, 2020 - With less than 30 days until one of the most pivotal presidential elections in a generation, confusion would seem to be the reigning power in our country. It is no wonder that equities have started to drift. Equities started the third quarter so strong that even the perpetually lagging Dow Jones Industrial Average was almost back to its pre-COVID highs before the September sell-off sent them reeling. Now investors are facing a sea of red in their heat maps as even the supposedly “defensive” FAANG stocks have suffered double digit losses over the past month and only interest rate sensitive utilities show any green shoots. Talk about a land of confusion.
Confusion may be king, but the start of another quarter at ETF Global means it’s time to turn to our analytically driven Quantitative Model to update our ETFG Dynamic Model Portfolios, including all 4 of the base portfolios and the 8 “tilts.” While the recent selloff in the S&P 500 shows that larger-cap stocks are struggling for direction, our ETFG Quant model still favors small-cap funds as it has for several quarters. That might not surprise our regular readers, but the reasons why those small-cap funds score so highly in our Quant Model might not be what you think.
The ETFG Model Portfolios began overweighting mid and small-cap funds in 2019 driven by their substantially higher fundamental scores relative to their larger-peers as well as their own historical price multiples. That is encapsulated in our ETFG Fundamental score, where if we reranked the fund universe available to our model portfolio strategies, only a handful of the 25 highest scoring ETFs would be large-cap funds. Those selections would have a distinct bias towards value stocks. Strategists will of course argue valuations hardly matter in a world of permanently low interest rates, but funds like the SPDR S&P 500 ETF (SPY) are trading just below all-time high multiples, offering little room for further expansion where small-cap funds are substantially below even more recent, short-term averages.
Strong fundamental scores are only part of the reason the ETFG Quant Model favors small-cap funds, the continuing improvement in momentum along with higher values for our contrarian sentiment indicators has boosted their ETFG Behavioral scores as well! Smaller-cap focused funds clearly underperformed over the past year, but 2020 has seen the beginnings of a shift with funds like the iShares S&P SmallCap 600 ETF (IJR) performing in line with SPY over the past three months. Price momentum is just one component, other new additions to the strategy like the iShares Russell 2000 Value ETF (IWN) find themselves included thanks to high short interest as well as an elevated put/call ratio which gives it a strong sentiment sub-score.
Big changes are afoot within the International sleeve of our portfolio as the ETFG Quant model shifts both the average market cap and geographic location of its selections. The third quarter allocation was split between large and small-cap funds with a value focus as well as hedged and unhedged performance as the dollar weakened to levels not seen since 2018. With the dollar stabilizing, the model has shifted focus away from hedged products and towards larger names with the addition of the Invesco RAFI Strategic Developed ex-US ETF (ISDX) and Invesco S&P International Developed Low Volatility ETF (IDLV). Beyond a slight overweight to value stocks, the only other shared attribute of the two are large allocations to Japanese stocks, among the best international performers in the third quarter. Allocations to the Pacific Rim are boosted by the return of two country-specific funds offering enhanced exposure to stocks in South Korea and Singapore.
That shift towards larger value stocks in Asia also impacted our emerging market allocation with the addition of the Invesco RAFI Strategic Emerging Markets ETF (ISEM). The fund has a focus on high quality, large companies according to the Invesco website and need to have both a high size and quality score to make the portfolio. That might explain why the fund has nearly 60% of its assets in Chinese stocks, compared to 40% for the MSCI Emerging Market Index. Joining it is the WisdomTree Emerging Markets SmallCap Dividend Fund (DGS) whose focus on higher yielding Taiwanese names which seems to be the perfect counterbalance.
To learn more about our ETFG Model Portfolio strategy, please email us at sales@ETFG.com or call us at (212) 223-ETFG (3834).
_______________________________________________________
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.
