Leveraging Model Portfolios for Election Year Equity Positioning

Presidential election years, of which 2020 is one, can be tricky to navigate for equity investors. Good news: historical data confirm stocks usually rise in these years and advisors can capitalize on that theme for clients with proper positioning via model portfolios.

An idea to consider is the Core Equity Model Portfolio, which is part of WisdomTree’s broader offering of Modern Alpha Building Blocks portfolios.

Core Equity “is designed for growth-oriented investors with a long-term horizon looking to maximize long-term potential for capital growth through a globally diversified set of equity ETFs,” according to WisdomTree.

The model portfolio is entirely allocated to stocks and is spread across 11 ETFs featuring both domestic and international exposure.

Diversification Matters

Allocations to international stocks and lower volatility, quality domestic dividend fare are among the advantages of WisdomTree’s Core Equity portfolio in an election year.

“The S&P 500 typically rose during U.S. Presidential election years: the benchmark posted a positive price return in 17 of the last 23 election years, giving it a hit rate of roughly 74% and an average return of 7.05%,” according to S&P Dow Jones Indices. “But there was substantial cross-sectional variation in election returns: there was a return spread of over 75% between the S&P 500’s best election year (1928) with its worst (2008).”

One of Core Equity’s components is the WisdomTree Earnings 500 Fund (NYSEArca: EPS), a smart beta alternative to cap-weighted domestic large-cap equity strategies, which could be an alternatively-weighted strategy for investors to consider when markets steady and volatility abates.

EPS targets an earnings-weighted index that screen for positive cumulative earnings over their most recent four fiscal quarter period and assigns weights to components to reflect the proportionate share of the aggregate learning’s each company generated, so those with greater earnings have larger weights. That gives the fund value and quality tilts.

“It is important to recognize that the performance of the S&P 500 during election years has typically been similar to its performance during other years,” according to S&P Dow Jones.

EPS holds nearly 500 stocks, but its sector weights differ from those of the S&P 500. The profitability metric employed by EPS has proven to be impactful for long-term investors. That quality tilt could be meaningful if markets don’t like the election results or if gridlock in Washington is rapidly priced in.

For more on how to implement model portfolios, visit our Model Portfolio Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.