Chief strategist's all-ETF portfolio favoring mid-caps, consumer staples and tech, while staying global in health care funds.
Keith Lerner constructs and oversees exchange-traded funds model portfolios for hundreds of brokers and advisors at SunTrust Robinson Humphrey. He utilizes both fundamental and technical analysis to put together long-term-oriented investment plans for clients.
The Atlanta-based chief market strategist emphasizes a diversified approach when building global ETF portfolios. That's especially important in these volatile times, Lerner says.
To get his take on how his ETF strategy is playing along Wall Street these days, IndexUniverse's Managing Editor Murray Coleman caught up with the busy manager on Tuesday.
IndexUniverse (IU): You believe the market's heavily oversold, don't you?
Keith Lerner (Lerner): In mid-July, I put out a report suggesting the market was very oversold. We've also seen some data that indicates we've hit a short- to intermediate-term bottom. Typically, that could last one to three months. It could develop into something more, but we're not ready to make that call yet. We want to see how much more staying power this rally might have.
IU: With such a forecast, how are you playing ETFs?
Lerner: Right now, our global ETFs portfolio has about a 10% cash position. That's about normal and about where we were at the end of last year. In January, we added iShares S&P Global Healthcare (NYSEArca: IXJ). About two-thirds of its portfolio holds U.S. stocks and the rest is international. We think that's important since in a presidential election year, there could be some headline risk with domestic names in the sector. So we're making sure to have at least some international exposure in our health care investments right now.
Another reason we like health care is that valuations are relatively cheap and IXJ has a dividend yield of 3%. In a choppy market, having a nice dividend yield is important.
IU: What else do you like in this environment?
Lerner: We also added to our mid-cap exposure earlier this year. We think it's a sector that's often overlooked. Mid-caps seem to be in a sweet spot right now. They've got strong growth characteristics, reasonable valuations and they're more able to withstand downturns than small-caps. And many of the names have even better longer-term growth prospects than large-caps.
IU: What ETFs are you favoring in this part of the market?
Lerner: We're using MidCap SPDRs (AMEX: MDY) and iShares S&P MidCap 400 Growth Index (NYSEArca: IJK). The MDY provides very broad-based exposure and IJK gives us growth tilt. We think in a slow economic environment, investors will pay a premium for companies that can generate above-average growth.
IU: Is your portfolio more slanted toward domestic or foreign stocks?
Lerner: Right now we've got about 62% in domestic stocks and 26% in international ETFs. Through most of last year, we had close to 30-32% in international. But we've brought our foreign stock exposure down a bit this year. Part of that was due to the outperformance of some of these funds—we wanted to protect those gains. So we put more into U.S. stocks and a little more into cash.
IU: What ETFs do you use on the international side?
Lerner: Our core holding is the iShares MSCI EAFE Index (NYSEArca: EFA). Then we have smaller positions in the iShares MSCI Emerging Markets Index (NYSEArca: EEM) and the Claymore/BNY BRIC (AMEX: EEB).
We most likely wouldn't be adding to those emerging markets positions in the near term. We still have some exposure because the long-term secular terms are still in place. But with slower global growth and pressure in the commodities space, we don't think emerging markets will keep outperforming.
IU: Domestically, you're also using some sector ETFs, aren't you?
Lerner: We're using two sector ETFs. One is the Technology Select Sector SPDR (AMEX: XLK). We like technology for a number of reasons. In this environment where credit conditions are tighter, we think strong balance sheets are a real plus. And many of the large-cap Tech companies are in strong positions in that sense. And unlike many sectors that have been impacted by commodities pricing, Technology hasn't felt as much of a crunch.
IU: What else are you holding and like longer term?
Lerner: We also own the iShares Dow Jones U.S. Consumer Goods (NYSEArca: IYK). The name is a little misleading because this ETF mainly comprises Consumer Staples. It has been added in the portfolio as a defensive move, but also due to the global exposure many of the companies in this ETF have at this point. The group has been hurt a little bit by rising commodity pricing. They haven't been able to keep pace. But if commodities come down in the near term, that should benefit these companies. And these are names that've historically performed well in recessionary times.
IU: Anything else really stick out to you this year?
Lerner: What has been interesting this year has been the outperformance of small-caps against what the consensus was looking for at this point in an economic downturn. The Russell 2000 is down about 7.4% (through Aug. 4) compared to the Russell 1000 Index, which was down 13.7%. In the near term, we're unsure how that's going to play out. So we maintain exposure to small-caps because when markets start to turn up again, that's where you'd expect to see small-caps really outperform.