ETF Complete Strategy Insights: Mid-Year Review (Part 2)

James Kimball | July 21, 2019

The ETF Complete model closed the week up 0.2% compared to the SPY which closed down -1.2%.

The SPY edged out a new all-time on Monday before closing the week near its lowest levels. Earnings season is in earnest and a revolving door discussion about FED policy and a rate cut seemed to drive the market lower.

Stay tuned for the daily updates and log into the website to see holdings and additional performance data.

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This Week's Strategy Lesson: Mid-Year Review (Part 2)

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We continue this week with part two of mid-year 2019 review. Last week we looked at how rates and commodities have performed relative to equities. We also focused on the Sector models. This week we will look at the year-to-date data for different regional ETFs as well as the performance of ETF Complete model and its components.

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Markets started 2019 near their lowest levels in the last two years, after a big market swoon in the final months of 2018 saw it briefly reach a -20% decline. This ended up being more of a V-bottom with markets quickly recovering 2/3rds of the drop by early February and then just barely edging out a new all-time high in the S&P 500 in May.

In May, we saw another swing lower, this time over -7%, driven largely by concerns over trade and the possibility of ratcheting and punitive tariffs and trade restrictions. Additionally, there was a brief trade spat with Mexico and continuing tensions related to the Middle East and Iran.

The Asia etf (AAXJ) trades very similar to the China ETF (FXI) and took a fairly large hit in May from the deteriorating trade talks and has only recovered about half of that decline (compared to U.S. markets which put in a new all-time high on Monday).

ILF (Latin America ETF) is similarly dominated by Brazil which has its fair share of political controversy, though it remains one of the strongest country ETFs currently in terms of strength of momentum.

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The chart above shows the year-to-date performance of the ETF model and its components. The ETF models have largely lagged behind the S&P 500 due in large part to the timing of the V-bottom hitting just before new years and how those large quick moves and reversals can play out in the ETF models. Though the ETF Complete has marginally outperformed the index from its low in early May.

Unfortunately, the Sector models were hit disproportionately in the May drop due to their heavy allocation in Technology and Semiconductors, two sectors with some of the highest ties to Asia and most effected by the trade talks.

The current holdings of the model are fairly mixed between traditional longs and some alternative holdings. The Sector model currently had Gold Miners and Solar Power, two traditionally alternative holdings, with the third holding in Semiconductors (just rotated into them this week).

The country model is entirely in emerging market countries of Greece, Russia, and Brazil. The Global Macro model is in Solar Power, Water Resources, and just recently rotated into the NASDAQ 100 (QQQ).

This allocation reflects some of the dichotomous nature of the markets right now, just off of all-time highs but significant storm clouds are on the horizon and markets have shown a disturbing lack of resistance to sudden and steep declines.

It will be interesting to see how these holdings and allocations play out or change as the second half of 2019 unfolds.