Tactical Asset Allocation With ETFs

The exchange traded products industry continues to grow. With a growing number of products come increased opportunities for advisors to employ more tactical strategies with ETFs.

Low-cost, highly liquid broad market ETFs, some of which are among the largest funds in the industry, are favored by advisors, strategists and other professional investors when building tactical ETF portfolios.

Standard & Poor’s Investment Advisory Services’ portfolio strategy committee combines fundamental analysis with the Black-Litterman model, a mean-variance tool, in constructing its Capital Appreciation Model Allocation Portfolio (MAP). As S&P Capital IQ highlights in a new research note, the quantitative effort is run through a portfolio optimizer while the portfolio’s qualitative screen is reviewed quarterly to consider allocation changes within a 12-month investment horizon.

“For example, outside of the U.S., S&P Investment Advisory Services expects a gradual improvement in economic conditions in Western Europe relative to emerging markets,” said S&P Capital IQ in the note.

Current global allocations in S&P MAP portfolios include the iShares Core MSCI EAFE ETF (NYSEArca: IEFA) and the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG). IEFA and IEMG replaced the iShares MSCI EAFE ETF (NYSEArca: EFA) and the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) in the MAPS portfolios.

That can be viewed as another sign of the success of the iShares core suite of ETFs, which launched in October 2012. Although the core ETFs, including IEMG and IEFA, were initially geared toward cost-conscious retail investors, institutional investors clearly like low-fee ETFs as well as highlighted by the almost $7 billion in combined assets under management at IEMG and IEFA. [iShares Core ETFs Gain Institutional Fans]

S&P MAPS portfolios currently hold 13 ETFs with expense ratios ranging from 0.17% to 0.2% per year, according to the research note.

In April, MAPS portfolios trimmed equity exposure by 200 basis points, including a reduction in exposure to the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) amid concerns that small-caps had become too richly relative to large-caps, said S&P Capital in the note. [Study Small-Cap Indices Before Buying ETFs]

Other MAPS equity-based holdings include the iShares Core S&P 500 ETF (NYSEArca: IVV) and the iShares S&P 500 Growth ETF (NYSEArca: IVW), which S&P Capital IQ rates overweight.