The seasonal FSM models were evaluated based on market data through the close of Monday, Nov. 2nd, with model alerts sent out Tuesday morning, Nov. 3rd.  These models have been updated with new holdings and rebalanced to their target weights.  To see all of the FSM model changes, visit our model listing page and select FSM under Methodology and New Activities under the filter section.  While there, be sure to click on the bell icon for any models you wish to receive alerts and stay up to date when any changes are made in the future.

One of the changes we would like to highlight today is in the AdvisorShares Dorsey Wright FSM All Cap World ETF DWAW, which is based on the FSM CoreSolution All Cap World 2S PR4050 model.  The strategy selects the first and second-ranked ETFs from a list of highly liquid, core based-funds including size and style ETFs, both domestic and international.  However, the manner in which the ETF will raise cash is different.  While the FSM model reviews the PR4050 offense/defense indicator on a monthly basis, the strategy for DWAW reviews the indicator weekly.  If triggered, the strategy incrementally increases or decreases cash exposure by scaling into a defensive or offensive allocation (Source: AdvisorShares).

With this quarter’s evaluation, the Invesco QQQ Trust QQQ was sold and the iShares Morningstar Small Growth ETF JKK was bought.  The current allocation is 50% in the iShares MorningStar Mid Growth ETF JKH and 50% in the iShares MorningStar Small Growth ETF JKK.

On a year-to-date basis as well as fund inception, both the model and model-based ETF have outperformed their benchmarks as shown below.  On a technical basis, DWAW currently possesses a strong fund score of 4.20, which is above our optimal threshold.

• TrueShares releases its November defined outcome ETF.
  • The TrueShares Structured Outcome (November) ETF (NVMZ) provides downside protection between 8-12% and looks to participate in around 85% of the upside.
  • NVMZ comes with an expense ratio of 0.79%.
  • TrueShares defined outcome ETFs use flexible exchange (FLEX) options on the S&P 500 Price Index or ETFs tracking that index.

• iShares debuts a new small cap value ETF.
  • The iShares Factors US Small Cap Value ETF (SVAL) tracks the Russell 2000 Focused Value Select Index which uses three different value metrics to pick value names from the Russell 2000 universe.
  • Currently, SVAL has 250 holdings that are all equally weighted.
  • SVAL comes with a 0.30% expense ratio.

• Global X launches two ETFs focused on technology disruption.
  • The Global X CleanTech ETF (CTEC) focuses on companies producing, storing and implementing renewable energy and related tools.
  • The Global X Data Center REITs & Digital Infrastructure ETF (VPN) focuses on the infrastructure underlying communication technology and digital growth. VPN invests in semiconductors, data centers, and cell towers.
  • CTEC and VPN carry expense ratios of 0.50%.

(Source:etf.com)

Momentum Seasonality

December has historically been very strong for momentum, but November has been more of a mixed bag.  Below are the average monthly returns of the momentum spread (Leaders minus Laggards):

Momentum Spread

There are two outlier Novembers in 2001 (-14.9%) and 2002 (-25.8%) that skew the monthly average lower.  Excluding those two months, the spread has a similar return in November to the return on January and October. 

The low spread numbers are primarily driven by the returns of the laggard stocks.  November is the second month for laggard stock returns.  The same years (2001 and 2002) were particularly strong for the laggard names. 

Momentum Laggards

Looking at high momentum stocks, November has actually been near the average of the other months. 

Momentum Leaders

November has been a mixed back for the leader vs. laggard relationship.  High momentum has generally performed well, but there have been a few bouts of large laggard outperformance.  With the election occurring this year, we may have a volatile month for momentum, but that is not something that will happen for sure.  Given that December has historically been the best month for momentum, it is prudent to take a wait-and-see attitude rather than proactively shedding high momentum names right before the historically strongest month of the year.

In Monday’s report, we updated our market seasonality study that employs original observations from Yale Hirsch to illustrate how substantive the performance bias has been within the “seasonally strong” half of the year when compared to the "seasonally weak" period.  As of the close last Friday, we ended the seasonally weak period and officially moved into the strong season of the market (Nov 1st through April 30th). This year, the “seasonally weak” period was not particularly weak as the S&P 500 SPX was gained 12.28%, while the Nasdaq gained nearly 23% (on a price return basis from 4/30/20 through 10/30/20). However, the strong performance during the seasonally weak period came on the heels of the first quarter, which was one of the worst in recent memory. It isn’t easy to know when the market will buck a historical trend, and this is one of the reasons why we've put forth the concept of a seasonal "tilting" approach that employs "smart-beta" investment options. This is a way to incorporate a long-term, well-documented bias in the market, without resorting to an “all in or all out” strategy that many investors may find unpalatable. This strategy also provides an opportunity to further your own differentiation within the wealth management space as an expert in ETFs and their implementation.

Today, we will evaluate one of the more popular seasonal portfolios, which utilizes two complementary smart-beta products discussed often – the Invesco DWA Momentum ETF PDP and the Invesco S&P 500 Low Volatility Portfolio SPLV. These two products are based upon different return factors (High RS & Low Volatility), and as a result, they tend to have different holdings and short-term outcomes. When put together, these funds tend to have a complementary relationship, producing solid long-term returns, with a fairly low correlation of excess returns. This combination makes for an attractive US "core" equity solution and a starting point for a seasonal "tilting" strategy.

The basis for our strategy lies in the historical bias that having exposure to the market during the "seasonally strong" six months is a good thing, and having exposure to the market during the "seasonally weak" period has caused more headaches than beneficial returns. This year the common wisdom did not apply as each of the major US indices each posted positive returns and momentum outperformed low volatility during the weak period of the year. This year’s performance illustrates why a tilting approach is preferable to simply following the “sell in May and go away adage.” Not to mention that the idea of being completely out of the market for an entire six months every single year is not likely to get your clients excited, let alone prudent from a compliance standpoint. With that said, this strategy looks to overweight the strongest areas of the market during the "seasonally strong" period, and shift the overweight exposure to the more defensive, lower volatility names during the "seasonally weak" period. Specifically, this portfolio holds a 70% allocation to PDP and a 30% allocation to SPLV from November 1st - April 30th, and during the "seasonally weak" six months (May 1st through October 31st), the portfolio switches to 30% PDP and 70% SPLV.

As you can see in the table below, this year notwithstanding, SPLV has generally provided greater returns during the "seasonally weak" six months (cumulative return of +69.5% since 4/30/1997) than PDP (+56.8%) However, SPLV has notably lagged the return of PDP during the "seasonally strong" six months, up +152.56% compared to +783.46%, respectively. Therefore, a 30% PDP/70% SPLV split during the "seasonally weak" six months has seen a cumulative return of +72.05% while a 70% PDP/30% SPLV split during the "seasonally strong" six months has seen a return of +554.86%. Interestingly, the 70/30 portfolio has now outperformed both the SPLV and PDP on a cumulative basis during the seasonally weak periods since 1997.  

The table below shows the annual returns for each of the strategies. The PDPSPLVSEAS Strategy continues to outperform a simple 50/50 split between PDP and SPLV, as well as the S&P 500 Index SPX As mentioned above, the switching strategy also outperforms just SPLV but has trailed PDP over our study period, which has been amplified in 2020.

Legend:

PDP/SPLV Seasonal Switching Strategy – PDPSPLVSEAS - This portfolio is 70% PDP and 30% SPLV during the "seasonally strong" periods and switches to 30% PDP and 70% SPLV during the "seasonally weak" period.

S&P 500 Index – SPX

Invesco DWA Momentum Portfolio – PDP

50 / 50 PDP and SPLV – PDPSPLV - This portfolio is 50% PDP and 50% SPLV, rebalanced at the end of every year.

Invesco S&P Low Volatility ETF – SPLV

The table below shows the annual returns for each of the strategies. The PDPSPLVSEAS Strategy outperforms a simple 50/50 split between PDP and SPLV, as well as the S&P 500 Index SPX. As mentioned above, the switching strategy also outperforms just SPLV but has trailed PDP over our study period.

Disclosures:

Performance prior to each funds’ inception date are back-tested and based upon the underlying index shown below: 

Inception date of PDP is 3/1/2007, prior to that all testing is based upon the DWA Technical Leaders Index.

Inception date of SPLV is 5/5/2011, prior to that all testing is based upon the S&P 500 Low Volatility Index.

Inception date of DWAS is 7/19/2012, prior to that all testing is based upon the DWA Small Cap Technical Leaders Index.

Inception date of XSLV is 2/15/2013, prior to that all testing is based upon the S&P 600 Low Volatility Index.

Inception date of PIE is 12/28/2007, prior to that all testing is based upon the DWA Emerging Markets Technical Leaders Index.

Inception date of EELV is 1/13/2012, prior to that all testing is based upon the S&P Emerging Markets Low Volatility Index.

Inception date of PIZ is 12/28/2007, prior to that all testing is based upon the DWA Developed Markets Technical Leaders Index.

Inception date of IDLV is 1/13/2012, prior to that all testing is based upon the S&P International Developed Low Volatility Index.

Returns for all models and benchmarks are Pure Price Returns, excluding dividends and transaction costs.  Returns within the model portfolios are a result of back-testing.  Back-tested performance is hypothetical and is provided for informational purposes to illustrate the effects of the strategy during a specific period.  The hypothetical returns have been developed and tested by DWA, but have not been verified by any third party and are unaudited.  Back-testing performance differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.  Model performance data (both back-tested and live) does not represent the impact of material economic and market factors might have on an investment advisor’s decision making process if the advisor were actually managing client money.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss. 

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.

VictoryShares Model Changes
Beginning with the VictoryShares (VS) Equity Rotation Model, the strategy sold the VictoryShares Dividend Accelerator ETF VSDA because it fell out of the top two positions in the model’s relative strength matrix and purchased the VictoryShares US Small Cap Volatility Wtd ETF CSA as it was the next highest-ranking fund not currently in the model. We observe a notable tailwind behind small-cap equities, present in CSA as well given its acceptable fund score of 3.20 and strongly positive score direction of 2.70. The VS Equity Rotation Model maintains a heavily tilt toward domestic equities yet leans toward small-cap value and small-cap blend exposure. This marks the model’s fifth trade this year.... (Read more)

Invesco Changes: GUGGEWSECT & POWER4
There are changes to two Invesco models this week. The DWA Sector 4 Model POWER4 bought the Invesco DWA Industrials Momentum ETF PRN and sold the Invesco DWA Basic Materials Momentum ETF PYZ. PYZ was removed from the model because materials fell out of the top four in the model’s sector rankings.  In place of PYZ, the model added PRN because industrials moved into the top four sectors in the rankings. In addition to industrials, the model also has exposure to consumer cyclicals, healthcare, and technology. This is the eleventh change to the model this year. Year-to-date (through 10/30), POWER4 has returned 2.1%, outpacing the S&P 500 SPX, which is up 1.21%, by about 90 basis points... (Read more)

ETF Highlight: iShares MSCI South Korea ETF (EWY)
There are no changes to any of the iShares models this week. As discussed in Tuesday’s report, We have recently seen strength in emerging markets as the iShares Emerging Markets ETF EEM has outperformed the S&P 500 SPX over the last month and the average score of the emerging markets group has moved above 4.0. From a geographical perspective, Asian Pacific countries have been one of the major drivers of the recent strength of emerging markets.... (Read more)

Daily Option Ideas for November 3, 2020