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Today marks the first trading day of the year. As done in previous years, we will recap the changes that we have seen throughout the various asset classes. Financial markets delivered strong results across the board, driven by easing inflation, multiple Fed rate cuts, and continued strength in technology and AI-related themes. These trends set the stage for an intriguing 2026, as we continue looking for areas of strength.

Domestic/International Equities

U.S. equities posted solid gains for the year, with the SPDR S&P 500 ETF Trust (SPY) up 17.72%, while the Invesco S&P 500 Equal Weight ETF (RSP) lagged at 11.20%, highlighting continued mega-cap dominance. Small-cap and mid-cap stocks stocks underperformed, with the  iShares Russell Midcap ETF (IWR) and small-cap (IWM) returning 10.37% and 12.66%, respectively, as market leadership remained concentrated in the largest names. The Invesco Nasdaq-100 trust (QQQ) was the strongest outperformer within domestic equities, surging 20.77%, fueled by strength in technology and AI-driven growth themes. While domestic equities delivered another strong year in 2025, momentum cooled in the fourth quarter, as Q4 saw returns well below its average for the year.

International Equities

International equities were the strongest relative performer out of all the major asset classes, as the group benefitted from many factors including a weakening US Dollar and broad easing of inflation. The iShares MSCI Emerging Markets ETF (EEM) was up almost 34% and was the best performing ETF representative in the best performing asset class. Over the past year, emerging markets benefited significantly from strong performance in large-cap technology stocks, particularly in countries like China and Taiwan.

Commodities

Commodities delivered mixed results in 2025. The subgroup within commodities that saw the most strength was the precious metals group. The SPDR Gold Shares ETF (GLD) was up over 63% as investors sought safety amid much geopolitical tensions. This marks one of the strongest years ever for Gold. Additionally, although not shown in the table, Silver also had a record year as the iShares Silver Trust (SLV) was up over 140%.

Fixed Income

Fixed income delivered a strong rebound in 2025, supported by three Fed rate cuts that drove yields lower and boosted demand for duration. Long-term Treasuries led the way, with the iShares 7-10 Year Treasury Bond ETF (TLT) gaining over 8%, outperforming its peers. Meanwhile, the iShares Core U.S. Aggregate Bond ETF (AGG) was the relative laggard, posting a 7.19% return for the year. 

As the books closed on the fourth quarter and 2025 this week, we saw strong action across most asset classes. International equity representative, SPDR MSCI ACWI ex-US ETF (CWI), have gained 28% year-to-date which places it well and above other representatives in 2025. Within the asset class rankings of DALI, domestic and international equities furthered their lead over commodities (3^rd) and the remaining assets - providing an offensive tilt entering a new year for the third time in a row.

As noted above, domestic equities ended the quarter maintaining their first position in the DALI (Dynamic Asset Level Investing) asset class rankings and positioned the asset class as an overweight within tactical relative strength (RS) based strategies. DALI is designed to help identify where strength (or weakness) resides across and within the broad asset classes. DALI strategies aim to overweight the strongest asset classes in the market and underweight the weakest. While overweight domestic, most tactical strategies maintained some level of international equities exposure - overweight in more aggressive RS strategies; minimum weight within more conservative RS strategies– while also maintaining minimum exposure to fixed income and avoiding broader currencies.  That said, before we look at the DALI performance review for the quarter, let's revisit the various strategies.

DALI Allocation Strategies

DALI No Bogey: One of the most basic strategies, DALI No Bogey, assumes owning the top two ranked asset classes in an equal-weighted fashion.

DALI with Bogey: Like the DALI No Bogey strategy, DALI with Bogey owns the top two ranked asset classes, but it also employs the Cash Bogey Check. If one of the two asset classes “Fails” that Cash Bogey Check, cash replaces it in the portfolio allocation.

3-Legged Stool: The 3-Legged Stool Strategy, as the name implies, consists of three slices. Two of the slices (or legs) are allocated to the top two asset classes emphasized in DALI, and the third leg is designed to be a constant equity exposure. Within this strategy, the managed equity exposure can take on a different meaning for each, but it is one way to further customize DALI by using individual stocks, ETFs, mutual funds, UITs, or a combination of all.

DALI Tactical Allocation: The Tactical Allocation, or 6-Legged Stool as this strategy has come to be known in some circles, is a strategy where 15% of the portfolio is allocated to domestic equities, international equities, commodities, and fixed income. That accounts for 60% of the portfolio. The other 40% is split between the top two emphasized asset classes in DALI. This has the effect of always maintaining exposure to four asset classes and then using DALI to know which asset classes to overweight.

DALI Flexible Allocation: In the DALI Flexible Allocation Strategy, each asset class is weighted in the portfolio based on the percent of total "buy signals" the asset class maintains relative to the current sum of "tally" signals. In this strategy you are always maintaining exposure to all six asset classes; however, depending on where the strength is in the market, you will be overweighting and underweighting different asset classes at different times.

DALI Tactical Tilt Allocation: Our Tactical Tilt program was designed to begin with a strategic target in mind, perhaps something along the lines of 60% stocks and 40% other "stuff" and then establish ranges within which the portfolio can adapt. As our research over the past years has proven, those ranges must be wide enough to allow real adaptation to take place but narrow enough to avoid the common complaints of "purely tactical" portfolios. In a sample moderate "Tilt" allocation, an offensive portfolio could have 75% exposure to US equities while a sample defensive portfolio could be only 20% US equities and 60% fixed income.

Click here to go to the DALI Strategies Page for current suggested allocations. Note that you can also see the Tactical Tilt Models under Models & Products > Models > Tactical Tilt (filter on left-hand side).

So, how do these work? First, we assign strategic boundaries to each asset class, which will vary according to the targeted risk tolerance of the portfolio. Once the minimum weightings in each asset class are satisfied, the remaining portfolio allocations are filled beginning with the strongest asset class in DALI up to that asset class's maximum allocation. Once the maximum weighting for the top-ranked asset class is achieved, you would simply fill the second-ranked asset class, and so on until 100% of the total allocation is applied. Using the "Moderate Tilt Allocation" as an example in the current market, 20% would go to domestic equities to fulfill the minimum requirement, 5% to international, 20% to fixed income, and 0.5% to cash. The remaining 54.5% is left to "Tactically Tilt.” Since domestic equities are currently the number-one-ranked asset class, they can receive all the remaining allocation of 54.5%, giving that asset class a 74.5% total allocation.

The following performance quilt shows several sample portfolios for the period beginning 12/31/2012 and running through 12/31/2025. Certain strategies do better than others at different points in time and in different market environments, which is evident in the yearly breakdown. Because we have been in a strong bull market for US equities for most of this period, the strategies that have allowed for the greatest overweight to that asset class ultimately rise to the top in cumulative performance. However, other years, like 2022, saw different asset classes rise to the top of the performance rankings, highlighting the importance of using a tactical approach to shift the allocation when needed.

While certain markets can lend themselves nicely to asset class rotation, it is often the sub-asset class decisions that help generate significant alpha in the portfolio over time. For example, should you be overweighting technology or real estate? Treasuries or high-yield bonds? Emerging or developed markets?

The quilt below displays variations of the DALI Strategies discussed above but adds that additional layer of relative strength analysis to the sub-asset class level. To accomplish this, we have substituted DWA-guided ETF Models' returns for each asset class instead of an index proxy. For example, instead of buying the iShares Core S&P US Total Stock Market ETF (ITOT) for our US Equity exposure, the quilt below assumes an investment in the First Trust Focus Five Model (FTRUST5) for exposure to the asset class. As you can see, adding this layer of analysis to your portfolios offers value to asset allocation strategies.

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