And for commodities in PowerShares DB Commodity Tracking Index Fund (DBC):
Stated another way, the euphoria that many in the media are expressing over the recovery of SPY and the near record performance for QQQ may be premature. Small caps, high yield bonds and commodities are all lower in October than they were at their September high points; IWM, JNK and DBC are all below 200-day moving averages as well.
Regular readers will recall that I reduced risk in June and July while detailing the fundamental, technical and economic challenges straight up through mid-August. The tactical asset allocation shift was threefold. One, reduce the percentage weighting to riskier assets. Two, reduce the type of risk exposure. And three, raise cash for near-term preservation of capital as well as future buying opportunities.
For instance, a moderate growth/income client might typically have had 65%-70% stock (e.g., large, small, foreign, domestic) and 30%-35% income (e.g., investment grade, higher yielding, short, long, etc.). Prior to the August-September correction, we lowered the exposure to 50% equity (mostly large-cap domestic), 25% bond (mostly investment grade) and 25% cash/cash equivalents.
I am not convinced that re-establishing exposure to smaller companies via IWM or higher yielding bonds via JNK is sensible. And while I remain skeptical about market-cap weighted large-caps gaining significant ground in spite of ongoing signs of risk aversion, I did not ignore the successful retest of August lows for SPY and QQQ. The “original” ETFs and/or extremely similar ones like Vanguard Total Market (VTI) and iShares Large-Cap Growth (IWF) received incremental purchases here in October.
In sum, the 50% equity component has been raised to 60%, though it remains primarily dedicated to the large-cap domestic airspace. Small caps and foreign? The evidence of recovery is not compelling enough. What’s more, with high yield failing to break out, we are keeping the 25% allocation to investment grade bonds intact. This leaves 15% in cash/cash equivalents. And, due to fundamental, technical and economic warning signs, we are maintaining an overall risk profile that is less than what we might otherwise have.
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Disclosure Statement: ETF Expert is a web log (“blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.