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 is by Scott Kubie, chief strategist of Omaha, Nebraska-based CLS Investments.
Over the last two years, I’ve written 15 columns analyzing the ETF landscape and providing recommendations for ETF strategies. As we approach the turning of the calendar, it seems like the right time to revisit those ideas to see whether they worked out. More importantly, I’ve added a brief update on whether my recommendations still hold or my views have changed.
The articles have ranged from advocating sectors, regions, countries and factor ETFs. Of the 15 articles, seven produced positive results, four were negative (although the PowerShares QQQ (QQQ | A-64) article was more about index design), two were neutral and two were informational in nature.
I look forward to trying to match that record in the coming years.
Starting with the most recent article:
Sept. 24, 2015
Results: iShares U.S. Healthcare (IYH |A-95) lagged the Russell 3000 by 2.47%. (Positive)
Commentary: Price trends reversed and the potential for an interest rate hike weighed on the sector. On a relative basis, the move outperformed. Valuations and fundamental risk remain a challenge for health care. Continue to look elsewhere for value-added opportunities.
Aug. 24, 2015
Results: iShares MSCI India trailed iShares MSCI China (MCHI | B-20) by 5.95%. (Negative)
Commentary: India’s fundamentals remain positive. Reforms, while slower than desired, are real. India benefits from cheaper commodities, which should increase growth potential relative to inflation. Stick with India in the coming year.
June 3, 2015
Commentary: Japan continues to look favorable based on its reforms and valuations. Debt levels and demographics represent long-term challenges. Continue to modestly overweight Japan in global portfolios.
April 28, 2015
Results: The equal allocation to iShares MSCI EAFE Value (EFV | B-93) and PowerShares International BuyBack Achievers (IPKW | D-54) outperformed the iShares MSCI EAFE (EFA | A-93) 0.13%. (Neutral)
Commentary: EAFE Value lagged on concerns over global growth and a rotation toward growth sectors. International companies buying back their stock performed well. Continue to stick with the buyback story for international stocks. EAFE Value looks undervalued. Fundamentals lean the other way, so make sure portfolios don’t rely too heavily on stronger global growth.
March 12, 2015
Commentary: This recommendation has more room to run. Valuations still favor mega caps, and increasing interest rates favor the type of companies listed in the Russell 200.
Nov. 25, 2014 (Annualized Performance)
Results: The three recommended ETFs/indexes – Vanguard Information Technology (VGT | A-92), DJ U.S. Airlines Index (no ETF at the time) and iShares U.S. Medical Devices (IHI | A-92)—outperformed the comparison group of the iShares U.S. Aerospace and Defense (ITA | A-84), iShares Russell 3000 (IWV | A-100) and iShares U.S. Healthcare (IYH | A-95) by 5.12%. (Positive)
Commentary: The likely policy actions have been mixed. Technology was recommended for a possible cut in the corporate tax on cash held overseas. No action yet, but it is still a likely part of any reform. Airlines were favored over manufacturers because the Export-Import Bank of the United States faced defunding. It ultimately was defunded, but funds were reinstated in the budget deal passed by Congress this month.
Medical device makers were expected to benefit from a reversal of the tax cut on medical devices in the Affordable Care Act. The recent budget deal delayed that tax for two years. I recommend investors continue to favor technology and medical devices. Export-import funding looks safe, so unwind the airline-manufacturer recommendation.
Sept. 12, 2014 (Annualized Performance)
Results: The Deutsche X-trackers MSCI EAFE Hedged (DBEF | B-72) bested the iShares MSCI EAFE (EFA | A-93) by 10.00%. (Positive)
Commentary: The default recommendation from the article remains: Hedge overweight international positions as a default. The period of large gains for the dollar is over, but I still favor hedging about 10% of the strategic allocation to international and any allocation above the benchmark.
Aug. 12, 2014 (Annualized Performance)
Results: While the iShares MSCI All Country Asia ex Japan (AAXJ | B-93) bettered the iShares Core Emerging Markets (IEMG | A-99) by about 6%, AAXJ lagged the iShares S&P 500 (IVV | A-98) by -16.75%. (Negative)
Commentary: Asian valuations still look attractive. Chinese growth has declined, putting pressure on its export partners. Emphasize targeted allocations to China and India over regional exposure.
July 16, 2014 (Annualized Performance)
Results: PowerShares’ Fundamental Investment Grade Corporate Bond (PFIG | C-76) outpaced the iShares iBoxx $ Investment Grade Corporate Bond (LQD | A-77) by 0.20%. (Not Applicable)
Commentary: This article was focused on letting investors know how many international issuers can be found in U.S. bond funds. Some “domestic” bond ETFs are up to 40% international. Investors should take these allocations into account when figuring how much to allocate to international bonds.
May 9, 2014 (Annualized Performance)
Results: The PowerShares QQQ ETF (QQQ | A-64) outperformed the substitute portfolio comprising the iShares MSCI USA Momentum Factor (MTUM | A-71), iShares Russell Top 200 Growth (IWY | A-94) and iShares North American Technology (IGM | A-87) by 3.84%. (Negative?)
Commentary: The main focus of this article was to criticize the QQQ for its index methodology. I proposed a substitute of the three ETFs above, investing half in the technology ETF and half favoring mega-cap growth and momentum. I continue to dislike ETFs that base indexes on where a company trades. Given the run in the QQQ, my substitute portfolio held up quite well.
April 4, 2014 (Annualized Performance)
Commentary: Italy still seems attractive. Consider an allocation to iShares MSCI Spain Capped ETF (EWP | B-95). Spain’s fundamentals and competiveness are improving more quickly.
Jan. 22, 2014 (Annualized Performance)
Results: iShares MSCI USA Momentum Factor (MTUM | A-71) surpassed the Russell 3000 by 5.40%. (Positive)
Commentary: Recent years have favored growth stocks and steady performers, and momentum captured those trends. Momentum stocks are generally riskier than the market, so while I continue to favor momentum stocks, I advocate blending them with quality ETFs to manage the risk.
Dec. 20, 2013 (Annualized Performance)
Commentary: Access to floating-rate Treasury bonds became a reality when an ETF launched three months later.
Nov. 21, 2013 (Annualized Performance)
Results: The average performance of the four technology ETFs: Technology Select SPDR (XLK | A-92), iShares North American Tech (IGM | A-87) and Fidelity MSCI Information Technology (FTEC | A-94) (all large-cap or all-cap); PowerShares S&P SmallCap Information Technology (PSCT | A-39), small cap) returned 3.68% more than the Russell 3000. (Positive)
Commentary: Glad the first one worked out. Technology has done well, and I expect that to continue. We live in the network era, and technology companies are at the center of connecting us to the rest of the world. Valuations are still reasonable and business models are strong. Interestingly, small-cap technology lagged large-cap by nearly 13% annually over the two-year period. If small-caps had been left out, the difference would have been more than 7%.
At the time of writing, CLS Investments held positions in these above-mentioned securities: IWV, INDA, MCHI, EWJ, EFV, EFA, IWR, VGT, IHI, DBEF, AAXJ, IEMG, IVV, LQD, QQQ, MTUM, IWY, EWI, ACWX, EWP. The firm is an Omaha, Nebraska-based third-party investment manager and ETF strategist. CLS began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using exchange-traded funds, with more than $2 billion invested. Contact CLS’ Chief Strategist Scott Kubie at 402-896-7406 or at [email protected]. Please click here for a complete list of relevant disclosures and definitions.