Using exchange traded funds as the cornerstones of tactically-driven asset allocation strategies continues to gain traction.
It is also becoming easier to build asset allocation models around ETFs. Some ETF strategists adhere to the traditional 60/40 equities and bonds split, but others, using measured approaches to risk management, increase equity exposure depending on the market environment.
“Windham Risk Regime I strategy, for example, can have as much as 80% of its assets in defensive assets (global fixed income) and as little as 20% in growth assets (global equities, global real estate and commodities) or could shift to a 20% defensive/80% growth mix. Windham focuses on measuring and identifying global risk factors before adjusting portfolio allocation that are optimal for the future risk environment,” said S&P Capital IQ in a new research note.
On the expectation of volatility continuing to remain subdued, Windham was aggressively allocated at the end of 2013 with 78% assets allocated toward growth themes, notes S&P Capital. [VIX ETNs Highlight Complacency]
One of the firm’s largest holdings is the popular Vanguard Total Stock Market ETF (NYSEArca: VTI). Prized for its deep lineup (the ETF holds nearly 3,700 stocks) and paltry fees (VTI charges just 0.05% per year), VTI is often used by advisors and investors as a S&P 500 replacement tool because of its massive number of holdings. [One-Stop Shopping With Total Stock ETFs]
VTI, which S&P Capital IQ rates overweight, has taken in $2.8 billion in new assets this year. Only seven ETFs have garnered more cash in 2014.
Windham also sees emerging markets as attractively valued compared to developed market equivalents, according to S&P Capital IQ. The strategist holds a stake in the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets.
Due in part to those compelling valuations and improved investor sentiment toward once downtrodden markets such as Brazil, VWO has climbed almost 13% in the past 90 days. There are key differences between VWO, which S&P Capital IQ rates overweight, and rival emerging markets ETFs.
For example, VWO’s underlying index does not view South Korea as an emerging market. Therefore the ETF holds no South Korea stocks. Some of that weight is deferred to China and Brazil. Those countries combine for almost 34% of VWO’s weight compared to 26.6% of the MSCI Emerging Markets Index. [South Korea Remains an Emerging Market]
Windham’s strategy also includes exposure to ETFs that track alternative asset classes, including the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) and the Vanguard REIT ETF (NYSEArca: VNQ).
Signs of a recovering U.S. economy and falling interest rates have been stoking investor interest in REIT ETFs. Only three ETFs have taken in more new assets this than the marketweight-rated VNQ. The ETF is up nearly 15% year-to-date.
Vanguard Total Stock Market ETF