The ongoing proliferation of the exchange traded products industry is allowing advisors and investors to take increasingly tactical approaches to asset allocation and portfolio building.
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.
“The strategically focused Capital Appreciation MAP, providing exposure to certain U.S. and international equity and fixed income sub-asset classes, such as large-cap growth, developed international, short-term and high-yield, is managed to avoid unnecessary turnover. Yet, certain styles are favored over others and allocation changes typically occur two or three times a year,” said the research firm.
The MAPS moderate strategy, which features the 60% equity/40% fixed income split favored by many advisors, continues to feature exposure to attractively valued emerging markets ETFs, as well as U.S. growth stocks and small-caps. [Tactical ETF Asset Allocation]
Standard & Poor’s Investment Advisory Services’ Portfolio Strategy Committee recently boosted its allocation to the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG). Although IEMG is dwarfed in size by and average daily dollar volume by ETFs such as the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and the iShares MSCI Emerging Markets ETF (NYSEArca: EEM), IEMG is attractive on a cost basis at just 0.18% per year.
IEMG is just 22 months old and already has $5.26 billion in assets under management, indicating the ETF has gained traction with institutional and retailer investors, alike. S&P “sees emerging markets as having a relatively attractive valuation to developed international markets and improving macroeconomic trends in key markets such as China, South Korea and Taiwan.” Those are IEMG’s three largest country weights, combing for 45.6% of the ETF’s weight. [Don’t Copy All Hedge Fund ETF Holdings]
The largest equity holding in the MAPS moderate strategy is the iShares S&P 500 Growth ETF (NYSEArca: IVW), which S&P Capital IQ rates overweight. IVW’s growth tilt comes by way of a 27.5% weight to technology stocks and a 16.4% allocation to consumer discretionary names.
The ETF’s growth posture is tempered a bit by a combined 34% weight to health care, industrials and financial services names, all of which can be seen as value bets in the current environment. A combined 10.1% weight to Apple (NasdaqGS: AAPL) and Microsoft (NasdaqGS: MSFT), two of this year’s top-performing mega-cap stocks, has driven IVW to a 10.5% year-to-date gain a new all-time high on Monday. [Changing ETF Strategies]
The MAPS strategy includes several bond positions with the largest being the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG).
“However, Standard & Poor’s Investment Advisory Services tilts the strategy toward short-term and high-yield ETFs, favoring taking on more credit- rather than interest-rate risk for its clients,” said S&P.
Additional fixed income positions in the MAPS strategy include the Vanguard Short-Term Bond ETF (NYSEArca: BSV) and the Vanguard Long-Term Bond ETF (NYSEArca: BLV). The strategy favors BSV because the ETF has an average duration of just 2.7% years compared to 14.4 years for BLV, making the former less sensitive to interest rate changes. Both ETFs charge just 0.1% per year, making each cheaper than an average of 88.5% of rival funds, according to Vanguard.
AGG is the ninth-best asset gather among all ETFs this year with inflows of over $2.7 billion. BSV has added $705.5 million in new assets.
iShares S&P 500 Growth ETF
Tom Lydon’s clients own shares of Apple, BLV, BSV EEM and IEMG.