Breech: Inside ETF Asset Allocation

January 09, 2014

For top-down asset allocators like Cougar Global, the variety of ETFs keeps getting richer and richer.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features James Breech, president and chief executive officer of Toronto-based Cougar Global Investments.

As a global asset allocator since 1993, Cougar Global from the beginning modeled broad asset classes—EAFE, emerging markets and U.S. equities.

And, as globalization has progressed and as more exchange-traded funds have become available, we have adjusted both our asset allocation analysis and used an increasing number of ETFs to construct our portfolios.

To be clear, Cougar Global models only broad investment-grade, fully liquid asset classes whose behavior we can understand using our “Multiple Economic Scenario Analysis.”

Not that many years ago, we modeled the Russell 3000 as a broad U.S. equity asset class. We’re still dealing with a similar universe of equities, but we’ve made decisions in the years since to look at these markets with a finer-toothed comb and even switch index families.

It’s all a reflection of a deeper ETF market that allows us to do our job better, which is definitely a change for the better in the way we serve our clients.

Changes To U.S Markets

Gradually, we separated U.S. equities into the Russell Top 200 using the iShares Russell Top 200 ETF (IWL | A-100), the Russell midcap via the iShares Russell Mid-Cap ETF (IWR |A-91) and small-caps with the iShares Russell 2000 ETF (IWM | A-80).

Beginning last year, however, we did further research and analysis into index construction and methodology.

By the first quarter of 2013, our research team concluded that the S&P index construction methodology more closely fit our investment criteria—specifically that we wanted our clients to hold profitable companies.

In the first quarter of last year, we shifted to the SPDR S&P 500 ETF (SPY | A-98), the SPDR S&P 400 ETF (MDY | A-82) and the iShares Core S&P Small-Cap ETF (IJR | A-89) for inclusion in our modeling.

More specifically, beginning in March 2013, our models had a clear preference for the S&P 400; consequently, we have been heavily weighted in U.S. midcap equities—ranging from 43 to 57 percent.

Generally, our models are now heavily weighted in U.S. equities. In addition to the S&P 400 Index via—MDY, we have 5 percent in SPY in most investment mandates, and up to 25 percent in IJR, the S&P 600 that covers small-cap equities.

Slicing Up EAFE

As recently as 2007, we continued to model both international developed-market equities (EAFE) and emerging market equities (MSCI emerging markets) using the appropriate ETFs to implement our decisions; namely, the iShares MSCI EAFE ETF (EFA | A-89).

However, a few years ago, we wanted to target our exposures more narrowly, so we split EAFE into its components and started modeling Europe, Japan and the developed Pacific ex-Japan market separately.


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