Discussing Portfolio Management with Two ETF Strategists
Last week on our podcast we had the pleasure of speaking with two exchange traded fund (ETF) strategists live in our studio for the hour—Steve Blumenthal, founder of CMG Capital Management, and Corey Hoffstein, Founder and Chief Investment Officer of Newfound Research.
Both Steve and Corey are quantitative investment managers and both incorporate elements of tactical portfolio management within their investment programs servicing primarily other financial advisors.
Momentum and trend following are key determinants of tactical portfolio rotation for both firms – but Hoffstein’s firm also incorporates ETF portfolio solutions that incorporate value investing, ‘carry’ as a factor and even defensive investing.
Markets priced for 2-4% Returns?
We discussed the market environment and the case for equities today. One thing that differentiates CMG and Newfound – Blumenthal commented that while he expects forward equity returns over the longer- run to be between 2-4% per year, he does not think valuations can be used as a guidepost for short-run decisions. Hoffstein’s firm, on other hand, incorporates capital market assumptions and valuations to adjust their expected returns in building certain long-run oriented portfolios.
Hoffstein’s firm was founded in 2008 and everyone was looking for risk management strategies when, certainly with hindsight, investors should have been embracing equity market risk. Today, Hoffstein believes investors are more complacent with the strong gains in equities we have witnessed since the bottoming of the crisis in ’09, and most investors are just moving away from active portfolio management to passive, low cost, ‘beta’ solutions.
Building Trending Global Portfolios
Blumenthal describes his firm’s core offering, a global product that evaluates 11 different portfolio sleeves – each with 8-10 different possible holdings—with higher beta exposures to lower beta exposures. Each of the 11 models are run using a relative strength model to evaluate the winning in each of 11 portfolio sleeves. They rotate this trading strategy as a way to achieve strong returns in the market. This portfolio is often used as an alternative allocation to traditional stocks and bonds and often in the role of 10-15% of a portfolio.
Building Optimized Portfolio from Valuations
Hoffstein described a model that does something very opposite – utilizing expected returns which is more mean reversion in nature due to its valuation sensitivity in driving expected returns. This portfolio –if it was done unconstrained – would have very little exposure to U.S. equities, and would be much heavier in emerging market equities, debt, local currency debt, and almost no traditional fixed income exposure. Many investors would not be comfortable with these net exposures, so Hoffstein constrains the optimizer to get a more well-rounded global portfolio.
Alternatives to Traditional Fixed Income Allocations
Hoffstein discussed how equities are harder to forecast future returns but bond returns are a bit more predictable and reliant upon the initial starting portfolio yield—which we know today are near historically low levels, particularly on an after-inflation basis (the 10-year TIPS yield today is around 0.40%).1
Steve talks about his tactical exposures for fixed income incorporates 9 different fixed income asset classes –evaluating the 9 different exposures and holding the top 2. He evaluates this weekly and will change it weekly – right now this is in emerging market local debt and municipals.
Hoffstein wants to unbundle fixed income portfolio attributes and then try to re-assemble a portfolio to its properties: different exposures for safety, income, hedging, and diversification. Hoffstein also believes with a skeptical yes one can even time duration using momentum signals –although ‘highly skeptical’ because models developed over the last 35-years have experienced a nearly one-way market with rates moving down so it is hard to know how robust it will be if the market environment changes in the future.
Other Alternatives for the ‘Great Reset’
Blumenthal is one of 4 ETF strategists that are being included in a John Mauldin portfolio solution that is the assembly of four ETF strategists doing independent trading strategies. With low rates, large amounts of debt outstanding, and pensions being under-funded, Mauldin believes these ETF strategists have a unique offering for portfolios and believes his team can serve as the core allocation for people—with Mauldin suggesting up to 60% of a wealth anchored to this team of ETF strategists. Watching this ‘all-star’ ETF team will be interesting, as one of the new places active management is taking place is with advisors who can go deep and narrow in utilizing ETF strategies.
This was a great discussion with two very thoughtful ETF strategists. I encourage you to listen and I thank-both guests for participating in our show.
Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.