{"id":2829,"date":"2022-01-18T21:47:32","date_gmt":"2022-01-18T21:47:32","guid":{"rendered":"http:\/\/blog.valuengine.com\/?p=2829"},"modified":"2022-01-18T21:53:43","modified_gmt":"2022-01-18T21:53:43","slug":"etfs-for-redeploying-core-equity-allocations-in-2022","status":"publish","type":"post","link":"http:\/\/blog.valuengine.com\/index.php\/etfs-for-redeploying-core-equity-allocations-in-2022\/","title":{"rendered":"ETFs for Redeploying Core Equity Allocations in 2022"},"content":{"rendered":"

Happy New Year!\u00a0\u00a0<\/span><\/p>\n

My previous column focused on the ValuEngine forecast targets for 6 Benchmark Index ETFs.\u00a0 To varying degrees, our models expect all of them to post negative price returns.\u00a0 The question for investors concerned with a downturn is what to do and, if reallocation from assets committed to core equity is required, how much should be reallocated and where should these assets go?\u00a0\u00a0<\/span><\/p>\n

All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 500 ETFs have been updated on\u00a0www.ValuEngine.com<\/a><\/strong><\/h5>\n
Free Two Week Trial to all 5,000 plus equities and ETFs covered by ValuEngine\u00a0HERE<\/a><\/strong><\/h5>\n

The answer to this question as it is with most things in investments is \u201cit depends.\u201d\u00a0 <\/span><\/p>\n

Key factors: Length of Time Horizon, Tolerance for Capital Losses, and Importance of Earning Current Income from Investments.<\/span><\/p>\n

There are three factors that determine the first item, Time Horizon:<\/strong><\/span><\/p>\n

1. Length of time until kids graduate<\/span>\r\n2. Number of years until retirement\r\n3. Number of years one expects to live after retirement.<\/pre>\n
Of course, we can only estimate these numbers until these milestones are passed or do not apply.\u00a0\u00a0<\/span><\/p>\n
Tolerance for Capital Losses<\/strong> also depends on three factors:<\/span><\/p>\n
1. The amount of time we have to recover from losses<\/span>\r\n\r\n2. Size of investment portfolio versus expenses and obligations\r\n\r\n3. Personal  capacity not to indulge in panic selling when substantial paper losses occur.<\/pre>\n
The Need for Current Income<\/strong> is a bit less complex. Typically, the importance of current investment income gets higher as we become older, are no longer earning wages and have to prepare for out-of-pocket medical expenses.\u00a0<\/span><\/p>\n
Getting back to the question, let\u2019s take care of two sets of investors who need not do change anything right now:<\/span><\/p>\n
    \n
  1. Investors who are more than 15 years from expected retirement age do not need to react to a potential market correction and should probably stick to their current allocations.\u00a0\u00a0<\/span><\/li>\n
  2. Income-first investors, please go back and read my December blogs about QYLD being an attractive alternative or supplement to standard fixed income holdings such as AGG.\u00a0 Since QYLD\u2019s income is derived from selling NDX call options, its dividend should remain high even if the Nasdaq-100 suffers a correction. QYLD has a yield above 13% while the yield of AGG is about 2%.\u00a0 Of course, QYLD has three times the price volatility of AGG even though its standard deviation is less than the S&P 500.\u00a0 In summary, whatever the choice of income vehicles for income-first investors, they probably have very little, if any, invested in core US equities.\u00a0 As such, a potential equity correction should not change their strategies.<\/span><\/li>\n<\/ol>\n
    The remainder of our analysis is focused on investors who do not fit into either of the first two categories and have a current core equity allocation of at least 30%. Tweaking the current allocation to trim some exposure to equity market risks makes more sense than resetting it entirely.\u00a0 Therefore, I recommend concerned investors in this position consider moving about 30% of their current core equity exposure to less volatile options. This should allow them to better weather a potential storm without bailing out altogether.<\/span><\/p>\n
    A multitude of ETFs that may tactically trim exposure to high volatility while providing participation are now available to investors.\u00a0 Here are some samples:<\/span><\/p>\n
      \n
    1. Low and Minimum Volatility Factor ETFs<\/b> \u2013 There are about a dozen indexed ETFs that target low price volatility stocks to limit downside risk.\u00a0 We will include the oldest of these, <\/span>SPLV<\/b>, the Invesco S&P 500 Low Volatility ETF, in our analysis. Its methodology is simple. It selects about 100 S&P 500 stocks with the lowest daily volatility over the twelve months. A more complex factor-based approach is taken by <\/span>USMV<\/b>, the iShares MSCI USA Min Vol Factor ETF. USMV is optimized to minimize overall portfolio price volatility while keeping other factor exposures similar to the S&P 500 Index\u00a0<\/span><\/li>\n
    2. Utilities Sector ETFs<\/b> \u2013 Some sectors by their nature are less volatile than others.\u00a0 US Utilities ETFs tend to have lower exposure to both the downside and the upside of S&P 500.\u00a0 <\/span>XLU<\/b>, the Select Sector SPDR Utilities ETF was the first Utilities ETF. It is comprised of all the utilities in the benchmark index.\u00a0 The chart below illustrates that for 21 years, XLU has generally, but not always, risen about half as much as SPY in strong years for the benchmark index and fallen about half as much when the S&P 500 fell.\u00a0 Its Beta of 0.47% reflects exactly that.<\/span><\/li>\n<\/ol>\n
      Intriguingly, there is also an actively managed option, UTES, the Virtus Reaves Utilities ETF that has performed well since its inception in 2017.\u00a0 Since many investors believe that in stormy markets, active managers can adapt to the changing environments and protect investors better than index funds.\u00a0 Therefore, UTES might make a highly desirable alternative to XLU.<\/span><\/p>\n
        \n
      1. \u201cBlack Swan\u201d ETFs<\/b> – the Amplify Black Swan ETF, SWAN, is designed to participate in 30% of S&P 500 returns by holding laddered 10-Year Treasury Bonds and using the income to purchase long-dated call options on the S&P 500.\u00a0 Since it holds no stocks, it is not covered by ValuEngine.\u00a0\u00a0<\/span><\/li>\n
      2. Buffered ETFs – <\/b>Introduced by a new firm called Innovator ETFs in 2019, buffered ETFs seek to protect against substantial drawdowns by limiting the upside and purchasing derivatives to limit losses.\u00a0 They are actively managed. One downside, they offer no dividend yield as they reinvest dividends to buy protective derivatives.\u00a0 Another quirk is that each Innovator offers twelve monthly series for each targeted level of loss protection.\u00a0 <\/span>BDEC<\/b>, for example, seeks to limit losses to no more than 9% for investors that enter in on December 1. It comes with a very high expense ratio, 0.89%.<\/span><\/li>\n
      3. Protective Put Option ETFs – SPD<\/b>, the Simplify US Equity PLUS Downside Convexity ETF uses a much simpler method to attempt to limit downside risk.\u00a0 It owns S&P 500 ETFs but can have up to 20% of its portfolio in put options as warranted by market conditions according to its decision rules.\u00a0 SPD\u2019s current expense ratio is 0.29% for giving investors convexity without the complexity of buffered ETFs.<\/span><\/li>\n<\/ol>\n
        Current ValuEngine reports on these ETF\u2019s can be viewed\u00a0HERE<\/a><\/strong><\/h5>\n
        BDEC and SPD do not have long enough histories to be included in our analytic data table. However, investors looking to trim exposure while remaining invested should check both out for themselves.<\/span><\/p>\n
        The table below lists data in pertinent categories for the other five ETFs referenced above as well as SPY, the original SPDR owning the S&P 500 Index portfolio.<\/span><\/p>\n
         <\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
        <\/td>\nSPLV<\/b><\/td>\nUSMV<\/b><\/td>\nXLU<\/b><\/td>\nUTES<\/b><\/td>\nSWAN<\/b><\/td>\nSPY<\/b><\/td>\n<\/tr>\n
        Market Index Being Tracked<\/span><\/td>\nS&P Low Volatility<\/b><\/td>\niShares-MSCI-US Minimum Volatility<\/b><\/td>\nSelect Sector SPDR Utilities<\/b><\/td>\nVirtus Reaves<\/b><\/p>\n
        Utilities<\/b><\/td>\n
        		Amplify Black Swan\u00a0\u00a0<\/b><\/td>\nSPDR S&P 500 Index\u00a0<\/b><\/td>\n<\/tr>\n
        ValuEngine Rating<\/span><\/td>\n2<\/b><\/td>\n3<\/b><\/td>\n3<\/b><\/td>\n3<\/b><\/td>\nN\/A<\/b><\/td>\n3<\/b><\/td>\n<\/tr>\n
        VE Forecast 1-yr. Price Return<\/span><\/td>\n-4.3%<\/span><\/td>\n-2.9%<\/b><\/td>\n-3.8%<\/span><\/td>\n-3.4%<\/span><\/td>\nN\/A<\/span><\/td>\n-3.1%<\/span><\/td>\n<\/tr>\n
        Historic 3 mo. Price Return<\/span><\/td>\n8.6%<\/span><\/td>\n5.1%<\/span><\/td>\n7.9<\/span>%<\/b><\/td>\n8.8%<\/b><\/td>\n4.7%<\/span><\/td>\n6.3%<\/span><\/td>\n<\/tr>\n
        Historic 6 mo. Price Return<\/span><\/td>\n8.6%<\/span><\/td>\n5.1%<\/span><\/td>\n8.8%<\/span><\/td>\n10.9%<\/b><\/td>\n-0.1%<\/span><\/td>\n11.0%<\/span><\/td>\n<\/tr>\n
        Historic 1-Yr. Price Return\u00a0<\/span><\/td>\n19.6%<\/b><\/td>\n15.5%<\/span><\/td>\n13.9%<\/span><\/td>\n16.3%<\/span><\/td>\n9.5%<\/span><\/td>\n27.1%<\/span><\/td>\n<\/tr>\n
        Historic 5-Yr Ann. Price Return<\/span><\/td>\n10.0%<\/span><\/td>\n11.6%<\/b><\/td>\n7.8%<\/span><\/td>\n9.5%<\/span><\/td>\n5.6%<\/span><\/td>\n14.5%<\/span><\/td>\n<\/tr>\n
        Volatility<\/b><\/td>\n13.5%<\/span><\/td>\n13.0%<\/span><\/td>\n14.8%<\/span><\/td>\n14.1%<\/span><\/td>\n8.3%<\/b><\/td>\n15.5%<\/span><\/td>\n<\/tr>\n
        Sharpe Ratio\u00a0<\/span><\/td>\n0.75<\/span><\/td>\n0.89<\/b><\/td>\n0.52<\/span><\/td>\n0.67<\/span><\/td>\n0.67<\/span><\/td>\n0.94<\/span><\/td>\n<\/tr>\n
        Beta<\/b><\/td>\n0.74<\/span><\/td>\n0.78<\/span><\/td>\n0.47<\/span><\/td>\n0.47<\/span><\/td>\n0.35<\/b><\/td>\n1.00<\/span><\/td>\n<\/tr>\n
        # of Stocks<\/span><\/td>\n102<\/span><\/td>\n173<\/b><\/td>\n30<\/span><\/td>\n21<\/span><\/td>\nNot Applicable<\/span><\/td>\n500<\/span><\/td>\n<\/tr>\n
        Undervalued by VE %<\/span><\/td>\n14%<\/span><\/td>\n28%<\/b><\/td>\n8%<\/span><\/td>\n10%<\/span><\/td>\nNot Applicable<\/span><\/td>\n29%<\/span><\/td>\n<\/tr>\n
        P\/B Ratio<\/span><\/td>\n2.8x<\/span><\/td>\n5.1x<\/span><\/td>\n2.2x<\/b><\/td>\n2.7x<\/span><\/td>\nNot Applicable<\/span><\/td>\n4.6x<\/span><\/td>\n<\/tr>\n
        P\/E Ratio<\/span><\/td>\n24.4x<\/span><\/td>\n25.7x<\/span><\/td>\n26.7x<\/span><\/td>\n31.3x<\/span><\/td>\nNot Applicable<\/span><\/td>\n25.7<\/span><\/td>\n<\/tr>\n
        Div. Yield<\/span><\/td>\n1.5%<\/span><\/td>\n1.3%<\/span><\/td>\n2.8%<\/span><\/td>\n2.0<\/span>%<\/b><\/td>\n5.1%<\/b><\/td>\n1.2%<\/span><\/td>\n<\/tr>\n
        Expense Ratio<\/span><\/td>\n0.25%<\/span><\/td>\n0.15%<\/span><\/td>\n0.12%<\/span><\/td>\n0.49%<\/span><\/td>\n0.49%<\/span><\/td>\n0.09%<\/span><\/td>\n<\/tr>\n
        Index Provider<\/span><\/td>\nS&P Dow Jones<\/span><\/td>\nMSCI<\/span><\/td>\nS&P Dow Jones<\/span><\/td>\nActive<\/span><\/p>\n
        Mgmt.<\/span><\/td>\n
        		Alerian S-Network Indexes<\/span><\/td>\nS&P Dow Jones<\/span><\/td>\n<\/tr>\n
        Index<\/span><\/p>\n
        Scheme<\/span><\/td>\n
        		Mkt. Cap Weighting<\/span><\/td>\nOptimized <\/span>Weighting<\/span><\/td>\nMkt. Cap Weighting<\/span><\/td>\nN\/A<\/span><\/td>\nStructured with Options<\/span><\/td>\nMkt. Cap Weighting\u00a0<\/span><\/td>\n<\/tr>\n
        ETF Sponsor<\/span><\/td>\nINVESCO<\/span><\/td>\niShares by Blackrock<\/span><\/td>\nSPDRs by SSgA<\/span><\/td>\nVirtus<\/span><\/td>\nAmplify<\/span><\/td>\nSPDRs by SSgA<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
        Current ValuEngine reports on these ETF\u2019s can be viewed\u00a0HERE<\/a><\/strong><\/h5>\n
        Key Findings:<\/span><\/p>\n
        1. Two rows in this table are the most relevant for tactical redeployment to safety.\u00a0 They are volatility, calculated by standard deviation of price fluctuations, and Beta which is the extent to which a security moves as much as the market in either direction.\u00a0 In terms of reducing market exposure and price volatility relative to the S&P 500, all 5 ETFs qualify as effective instruments to varying degrees.\u00a0 <\/span>SWAN<\/b>, the Amplify Black Swan ETF that is designed to be the most defensive of the five, achieved that goal with by far the lowest price volatility and the lowest Beta.\u00a0 SWAN also had the weakest returns of the five as could be expected as it only captures about 35% of market movements but it does provide a stabilizing dividend yield of 5.1%.\u00a0 The two utility ETFs each capture just under 50% of market movements and the two ETFs designed to restrict volatility have about 75% exposure to market movements.\u00a0<\/span><\/p>\n
        2. The most compensation in return for a given level of risk as measured by the Sharpe Ratio was posted by <\/span>USMV<\/b>, the iShares MSCI-US Minimum Volatility ETF.\u00a0 This is demonstrated by its Sharpe ratio of 0.9%.\u00a0 It also is the favorite pick of ValuEngine\u2019s models\u2019 forecast for 12 months ahead with a forecast of 2.9% as compared with 3.1% for the S&P 500.\u00a0 Its comprehensive risk management approach also mitigates the probability of potential unpleasant surprises from other market factors.\u00a0\u00a0<\/span><\/p>\n
        3, <\/span>SPLV<\/b>, the INVESCO S&P 500 Low Volatility ETF, also has a few things to recommend it.\u00a0 It has more comfortable valuation ratios and a slightly higher dividend yield than USMV and SPY. It also has the best 12-month performance. However, SPLV’s low rating of 2 (sell) from ValuEngine indicates that\u00a0 USMV, rated 3 (hold), is a better alternative from a timing perspective and tactical redeployment is all about timing.<\/span><\/p>\n
        4. The utilities ETFs have greater price volatility than SPLV and USMV but are more conservative choices from a Beta perspective.\u00a0 Both have the benefit of yields of 2% or better.\u00a0 <\/span>XLU<\/b>, the Select Sector SPDR ETF, has the higher dividend yield, nearly 3%.\u00a0 However, <\/span>UTES, <\/b>the actively managed Virtus Reaves Utilities ETF has delivered significantly higher returns compensating well for its higher management fee.\u00a0\u00a0<\/span><\/p>\n
        The bottom line is that redeployment to any of these five choices can be expected to decline less than core market exposure, represented here by SPY, in prolonged and\/or sharp downturns.\u00a0 The downside is that they can also be expected to underperform in up markets.\u00a0 The decision to make that tradeoff was the starting point for this analysis. Investors with very short time horizons and high-income needs should consider SWAN.\u00a0 Most investors are better off considering the remaining four to get some growth in up markets while having a reasonable expectation of lower participation in market plunges.\u00a0\u00a0<\/span><\/p>\n
        Which of the four? It depends on how important income is to you.\u00a0 <\/span>XLU<\/b> is the best remaining choice for income right now but if you have at least a five-year horizon, I personally prefer the actively managed <\/span>UTES<\/b> with a proven management team for alpha that can be nimbler in reacting to the specific factors causing a downturn.\u00a0 The best choice for growth and compensation for risk is <\/span>USMV,<\/b> so that would be of interest to investors with time horizons greater than 10 years.\u00a0 Splitting the redeployed assets between <\/span>USMV <\/b>and <\/span>UTES <\/b>would also be a sensible strategy.\u00a0\u00a0<\/span><\/p>\n
        Financial Advisory Services based on ValuEngine research available: \u00a0\u00a0<\/strong>www.ValuEngineCapital.com<\/a><\/strong><\/h5>\n
        Another ETF I wish to mention in this context is <\/span>JEPI, <\/b>an actively managed alternative to USMV focused on income and low volatility.\u00a0 Although its under two-year history is insufficient to calculate a three-year Beta, Standard Deviation and Sharpe Ratio, it certainly is off to a great start with provisional stats of 0.53 Beta, 14.2% for Standard Deviation and 1.50 for a Sharpe Ratio.\u00a0 Its 20% twelve-month price return is higher than any of the alternatives shown here.\u00a0 Most eye-catching is its 6.7% dividend yield.\u00a0 The track record is too short for real analysis, but just as actively managed UTES has outperformed XLU during the past 5 years, there is a good chance JEPI can outperform USMV and XLU going forward, especially in down markets.\u00a0 <\/span>\u00a0<\/b>\u00a0<\/span><\/p>\n
        These findings bring me back to my hot button issue.\u00a0 There are many years of overwhelming evidence supporting the contention that S&P 500 index funds outperform actively managed mutual funds.\u00a0 My contention since my published paper in 2001, updated in 2021 and available in the research section of the ValuEngine website HERE<\/a>, is that the culprits behind this relentless active underperformance are the gross inefficiencies of the traditional fund structure, NOT poor stock selection or portfolio management. <\/span>JEPI<\/b> and <\/span>UTES<\/b> join <\/span>DBLV<\/b>, <\/span>TTAC<\/b> and other actively managed ETFs I\u2019ve profiled in this blog that have compiled superior performance data thus far against their benchmark-based equivalent ETFs,\u00a0 This observation is especially salient if we are near an inflection point that will be followed by a lengthy S&P 500 downturn since active managers, generally not as overweighted in the highest momentum stocks, held up better than the S&P 500 during the first six months of many prior downturns.\u00a0 To paraphrase James Carville, it\u2019s not active management that should be abandoned as a solution to the problems with actively managed mutual funds, \u201cIt\u2019s the structure, stupid!\u201d<\/span><\/p>\n
        Herb Blank<\/p>\n
        Senior Quantitative Analyst<\/p>\n
        ValuEngine, Inc<\/p>\n
        www.ValuEngine.com<\/a><\/p>\n
        _______________________________________________<\/p>\n
        All of the approximately 5,000 stocks, 16 sector groups, 140 industries, and 600 ETFs have been updated on\u00a0www.ValuEngine.com<\/a><\/h5>\n
        Financial Advisory Services based on ValuEngine research available through\u00a0ValuEngine Capital Management, LLC<\/a><\/h5>\n
        Free Two Week Trial to all 5,000 plus equities covered by ValuEngine\u00a0HERE<\/a><\/h5>\n
        Subscribers log in\u00a0HERE<\/a><\/h5>\n","protected":false},"excerpt":{"rendered":"
        Happy New Year!\u00a0\u00a0 My previous column focused on the ValuEngine forecast targets for 6 Benchmark Index ETFs.\u00a0 To varying degrees, our models expect all of them to post negative price returns.\u00a0 The question for investors concerned with a downturn is what to do and, if reallocation from assets committed to core equity is required, how … Read more<\/a><\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[130,1,39],"tags":[1936,1761,1719,1733,1731,1819,1510,1938,1937,1729,1933,1934,1935,28,1656,1659,63,1900],"_links":{"self":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2829"}],"collection":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/comments?post=2829"}],"version-history":[{"count":7,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2829\/revisions"}],"predecessor-version":[{"id":2836,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/posts\/2829\/revisions\/2836"}],"wp:attachment":[{"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/media?parent=2829"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/categories?post=2829"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/blog.valuengine.com\/index.php\/wp-json\/wp\/v2\/tags?post=2829"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}