Q4 Rebalance – ETF Global Dynamic Model Portfolios

Tuesday, October 8, 2019 – At first glance, it looks like the bulls are back in charge of their own destiny. The tug of war between the Federal Reserve and the President was seemingly resolved in the 3rd quarter by the Fed cutting rates for the first time in over a decade as a weakening economy undercut its argument for a stable rate policy. Bullish investors were quick to celebrate by pushing the S&P 500 back above the 3,000 mark before the realization hit that the Fed lowering rates wasn’t an early Christmas gift after all. The Fed felt compelled to lower rates because the economic outlook demanded it, a fact which left investors even more unsettled. The most widely tracked index, the S&P 500, ended up slightly over 1% for the quarter.

The obvious answer of course was if at first you don’t succeed, try, try again. With the Fed showing no signs of relenting, the markets remain deeply unsettled as we entered the final quarter of 2019. The tug of war between the Fed and the markets won’t be resolved anytime soon if ever, but the ETFG Dynamic Model Portfolios wait for no one with all 4 of the base portfolios and the 8 “tilts” being updated on October 1st with major changes happening in all three sleeves of the portfolio. Investors may still be debating whether this market still has room to run but our Quant Model has come down firmly on the side of better safe than sorry as value takes precedence over growth throughout our model portfolios.

First is the domestic allocation, where the iShares Russell Midcap ETF (IWR) and the WisdomTree U.S. SmallCap Dividend Fund (DES) are removed to be replaced by the SPDR S&P 400 Mid Cap Value ETF (MDYV) and the SPDR S&P 400 Mid Cap Growth ETF (MDYG) which takes the lowest spot in the domestic sleeve. Staying in the portfolio for the final quarter are the SPDR S&P 600 Small Cap Value ETF (SLYV) and the SPDR Portfolio S&P 500 Growth ETF (SPYG).

Blending that combination of growth and value funds might sound like the best way to a perfectly “core” portfolio but under the hood you’ll find a very different situation. MDYV and SLYV are the two top selections, ranked by their overall ETFG Quant Score, which puts them into the driver seat with many of the “tilts” in the conservative, moderate and balanced strategies having a clear bias towards both value and mid-cap stocks. Investors shouldn’t fear this means a rotation in utilities or REITs as both funds are underweighted in those categories while overweighting technology and industrial names.

Our ETFG Quant model also has made significant changes to the international allocation with the replacement of the Schwab Fundamental International Large Company Index (FNDF) and its small cap equivalent FNDC, with two new funds with a distinctly European focus. Joining the model for the 4th quarter are the iShares Edge MSCI Min Vol Europe ETF (EUMV) and ProShares MSCI Europe Dividend Growers ETF (EUDV) as the Quant Model continues to favor more value-oriented products. Like most minimum volatility funds, EUMV has larger allocations to defensive sectors while heavily concentrated EUDV (with just 34 holdings) focuses on companies that have consistently grown their dividends over a ten-year period.

The emerging-market allocation also saw significant turnover this quarter as the iShares Edge MSCI Multifactor Emerging Markets ETF (EMGF) was replaced by the FlexShares Morningstar® Emerging Markets Factor Tilt Index Fund (TLTE) while the First Trust Chindia Fund (FNI) remains for another quarter. EMGF was a strong performer but TLTE’s stronger fundamental score pushed it into the model for the 4th quarter. How does it differ from EMGF? They have similar weightings to the same markets but EMGF had more of a focus on momentum and TLTE has a preference for value names along with a slightly higher tilt towards smaller stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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