May marks the second seasonal evaluations for the Fund Score Method (FSM) models. If you’re not familiar with the FSM model framework, a large majority of the models evaluate their holdings on a seasonal quarter basis with February, May, August, and November marking the start/end of each seasonal quarter. Each FSM model is built around a universe of ETFs or mutual funds with the highest scoring funds selected at each evaluation. If you want a deeper dive into the basics for FSM models, check out our Fund Score Method Model Guide. As we do during each evaluation season, we will cover the trades and themes to get insights into any shifts in market leadership. Whether or not one follows any of the FSM models, their evaluations give us important information.

The major theme during the most recent evaluation for the FSM models witnessed a shift from models maintaining a notable overweight toward international equities to U.S. equity exposure. In some cases, the FSM models have seen their allocations go from entirely within international funds to more equal mix of international and domestic equities with slight overweight to one asset class present within certain strategies, depending on model universe makeup. The prime example of such shift comes from the T Rowe Price 5S PR4050 Model, which saw the removal of the Spectrum International (PSICX), International Value (TRIGX), and Overseas Stock (TROSX) funds, and the additions of New Asia (PRASX), Global Technology (PRGTX), and Science & Technology (PRSCX) funds. While the naming of the funds may signal more of an overweight toward international equities, the T Rowe Price 5S PR4050 Model’s underlying allocation of the individual stocks reveals a slight overweight toward U.S. equities, primarily within technology and energy.

The Vanguard 5S PR4050 Model witnessed a similar shift in asset allocation, but with a slight twist, as it removed the European Stock (VEURX), Developed Markets (VDVIX), and International Stock (VGTSX) funds and added the Tax-Managed Small Cap (VTMSX), Strategic Equity (VSEQX), and Strategic Small Cap (VSTCX). The addition of small caps brings the model to overweight U.S. equities along with exposure to the Pacific Stock (VPACX) and Global Capital Cycles (VGPMX) funds.

Within the CoreSolution lineup of FSM models, the FSM CoreSolution All Cap World 2S PR4050 followed the overall theme for the quarter – removing international and bringing in domestic exposure - and saw a complete turnover within the model. This seasonal quarter evaluation witnessed the removal of both the Invesco QQQ Trust (QQQ) and the iShares MSCI Emerging Markets ETF (EEM), while seeing the additions of the iShares MSCI USA Momentum Factor ETF (MTUM) and Invesco S&P 500 Pure Growth ETF (RPG). Along with the All Cap World 2S PR4050 Model removing QQQ, the FSM CoreSolution U.S. Core 2S PR4050 also removed the ETF while adding the SPDR S&P 500 Trust (SPY) in its place.

Though the notable theme for the quarter saw a shift from portfolios potentially overweight or entirely within international equities to either a more equal mix of international and domestic or slightly overweight toward domestic, the recent changes highlight both asset classes continuing to show superior trending and relative strength characteristics highlights the strength within the risk-on assets versus commodities and defensive assets.

As of the close last Thursday (10/31), we ended the seasonally strong period and officially moved into the weak season of the market (May 1 – October 31). This year, in the “seasonally strong” period, the S&P 500 (SPX), Dow (.DJIA), and Nasdaq (NASD) each gained between 4% and 5.5%. Each of these major market benchmarks would have been in the red for that stretch were it not for the sharp rebounds seen in April. This marked the second straight year that the “strong” period underperformed the “weak” period immediately preceding it.

However, 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 factor investing. 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 offers an opportunity to further differentiate yourself within the wealth management space as an expert on investment factors.

Today, we will evaluate one of the seasonal portfolios that combines two momentum approaches while incorporating low volatility to ideally smooth out the ride over time. This is done by tactically shifting a portfolio's emphasis between the Invesco Nasdaq Dorsey Wright Momentum ETF (PDP) and the First Trust Nasdaq Dorsey Wright Momentum & Low Volatility ETF (DVOL) depending on the accompanying seasonal period. Since PDP is solely focused on momentum, it is the overweight fund during the “strong” seasonal period from November through April (70% PDP, 30% DVOL). The allocation then shifts to overweight DVOL during the “weak” seasonal period to provide more exposure to low volatility names (70% DVOL, 30% PDP). Even though both strategies focus on high momentum names, the low volatility screen used in DVOL has historically led to notable allocation differences. Combining the two approaches makes for an attractive US "core" equity solution.

This strategy is available under our Models page for platform subscribers to set alerts. Even though there will only be two trades a year, the website model can help with additional perspective or collateral needed before incorporating the strategy into your process. Remember, the point of any strategy won’t be (and shouldn’t be) to outperform every single year, but to create an all-weather portfolio that is systematic and defendable across various market environments.

The table below shows the annual returns for each of the strategies, incorporating back-tested data prior to the launch of each fund. We also include some notable observations on the returns over the years.

Key Observations:

• Each strategy shows higher cumulative returns than the S&P 500 Index, despite not outperforming every year.
• Buying-and-holding PDP shows the highest cumulative return of any strategy, the largest single-year return of any strategy (104% in 1999), and the worst single-year drawdown of any strategy (-46% in 2008). While it is easy to gravitate to the largest cumulative number, knowing what it takes to arrive at that number is important.
• Combining PDP and DVOL in equal allocations leads to more favorable returns during turbulent market environments for momentum such as 2000-2002, 2008, and 2021-2022.
• Adding the seasonal switching overlay to the model leads to more consistent returns over time, potentially making the reigns easier to hold.

Disclosures:

Invesco Nasdaq Dorsey Wright Momentum ETF (PDP): https://www.invesco.com/us/en/financial-products/etfs/invesco-dorsey-wright-momentum-etf.html

First Trust Dorsey Wright Momentum & Low Volatility ETF (DVOL): https://www.ftportfolios.com/retail/etf/etfsummary.aspx?Ticker=DVOL

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 on backtested strategy information available on the Dorsey Wright platform.

Inception date of DVOL is 9/5/2018, prior to that all testing is based on backtested strategy information available on the Dorsey Wright platform.

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 NDW, 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

Daily Option Ideas for May 5, 2026