"NorthCoast Asset Management ETF portfolios again caught the large-cap rally in Q2 from a commitment to U.S. stocks. The firm made minor adjustments to its portfolios, but maintained large-cap and midcap ETFs among its top holdings with a cautiously bullish outlook. NorthCoast remained upbeat on bets in Pacific region and emerging market ETFs....." Read the full article by clicking the link below. 

Investing For Retirement: Large-Cap Rally Fuels Gains for NorthCoast ETF Portfolios

Earlier this month, our ETF-managed portfolios were highlighted in the Investor's Business Daily. 

"NorthCoast Asset Management recalibrated the holdings of its ETF portfolios in Q4 as market turbulence kicked up. The firm added short-term Treasury ETFs and cut back on its exposure to Europe to weather the storm. It also saw sell-offs as buying opportunities. Here are highlights for the portfolios during the quarter..." Read the full article by clicking the link below. 

Investing For Retirement: NorthCoast Asset Management Shifted To Short-Term Treasury ETFs In Q4

We believe that the odds remain high that there will be two additional rate hikes in the first half of 2019. We expect these hikes to increase the volatility of equity and real estate prices as well as an uptick in corporate bond spreads and mortgage spreads. Our proprietary Duration Timing model has provided us with tools to actively manage interest rate risk. This model has indicated to increase duration in the tactical income portfolio by trimming iShares Interest Rate Hedged Long-Term Corporate Bond ETF (IGBH) and adding longer duration exposure with ETFs such as iShares 20+ Year Treasury Bond ETF (TLT).

With the announcement by the Federal Reserve concerning interest rates, we published a few thoughts about Tactical Income and its ability to mitigate interest rate risk.

Click the link below to read the publication:

Rising Interest Rates & Tactical Income, 9/24/2018

What appeals to you about U.S. large-cap equities (IVV) heading into the second-half of the year?

The U.S. economy is still fundamentally strong with job growth accelerating since September 2017 and unemployment rates reaching new lows. Wage growth, as measured by the employment cost index for private wages, has also been rising which is generally consistent with the tightening labor market and a narrowing in the unemployment rate gap. Manufacturing has become one of the stronger components of the U.S. economy with almost all of the regional economies picking up steam in recent months. As a result of this positive economic data our market timing model shows a slightly more bullish outlook for the U.S. equity market compared with the first quarter’s outlook.

Sentiment remains optimistic as the U.S. consumer is feeling more upbeat about its current financial situation. However, the Trump administration’s formal announcement of additional tariffs on Chinese imports has raised concerns about trade tension between the two largest economies in the world. These tariffs could increase uncertainty and weigh heavily on financial market conditions and the collective sentiment.

What has been the most notable performer in 2017 in your Tactical Income portfolio, and to what do you attribute its gains?

CLY, the iShares 10+ Year Credit Bond ETF, was certainly among the top performing positions in our Tactical Income portfolio this year. The security was up 12.1% and we currently hold about a 15% position in our portfolio. With the U.S. economy remaining fundamentally strong, the default rate of corporate bonds is relatively low. Our ETF scoring model showed an attractive aggregate score for CLY throughout the year with valuations and sentiment signals being the strongest contributors.

Exposure to global infrastructure from IGF (iShares Global Infrastructure ETF) was another noteworthy holding in 2017. As investors anticipated pro-growth policies and more infrastructure spending in the U.S., IGF climbed throughout 2017, finishing the year +19%.

For more commentary from CIO Patrick Jamin on the final quarter of 2017, Click Here

The Board of Trustees of iShares Trust has authorized a stock split for the iShares International Treasury Bond ETF (IGOV) for shareholders of record as of the close of business on August 28, 2017, effective after the close of trading on August 30, 2017.  Shares of the Fund will begin trading on a split-adjusted basis on August 31, 2017.The 2-for-1 split will lower the share price and increase the number of outstanding shares.

The total value of shares outstanding in your portfolio is not affected by the split. Detailed information is available on page 2 of the IGOV Summary Prospectus by clicking here. Additional information on stock splits can be found here. 

With the current available data, the probability of a rate hike in September is low. The market is currently pricing a 26% chance of a hike in September, 32% in November and 52% in December.   

The Tactical Income strategy allocation is well positioned for a possible rate hike. The portfolio has shorter duration and a higher yield compared to its benchmark of U.S. Bond Aggregate Index. We have also recently reduced our exposure to long-term treasuries position and increased our position in emerging market bonds to manage duration and yield risk. 

Exposure to high yield bonds remains one of the top holdings of the portfolio with an 11% weighting.  High yield bonds are generally less sensitive to interest rate hikes.  At the same time, we believe that U.S. economy is fundamentally strong, thus the default rate should stay low for high yield bonds.  The strategy also has decent exposure (approximately 25%) to alternative investment and dividend equity ETFs, which typically are also less sensitive to rate hikes and even perform well in interest rate rising environments.

Both domestic and international demand for investment grade corporate bonds is high.    Given the low and negative yield environment in Europe and Japan, the U.S. corporate bond market is one of the few supplies of high quality yield left in the current market. The relatively high yield of CLY (4%) can be helpful in boosting income for a retirement portfolio.

EMB was displaying a positive outlook on three of the four major categories for which we evaluate ETFs; valuation, macro and technical.  The Emerging market bonds seemed to deliver relatively strong performance after the Brexit vote.  Since then, we concluded the outlook of emerging market has improved with a stabilizing Chinese economy and commodity prices.   

What is attractive about CLY right now?

The expectation of fewer future rate hikes makes U.S fixed income with relatively longer duration more attractive. Three out of four categories of our indicators are positive for CLY: valuation, technical and sentiment. The relatively high yield of CLY (4%) can be helpful in boosting the income for the strategy.

There has been a recent pickup of inflows into high-yield bonds. What is your sentiment towards HYG right now relative to other bond holdings in your portfolios?

We are neutral on high yield bond.  Technical indicators have decreased together with sentiment indicators for HYG recently.  The rising price of oil has contributed to the rebound of credit spread and we believe that more future appreciation of HYG will be limited.

HYG (High-Yield) remained the strategy’s top holding while it added exposure to PFF (Preferred Stock). Regarding HYG, Patrick Jamin states, “historical data shows that high-yield bonds generally perform better than lower yielding bonds, such as government or credit bonds, in a rising interest rate environment.“

A 5% reduction in PFF (Preferred Stock) was replaced with a purchase of DVY (Select Dividend). Return potential is equally positive for both, however the low correlation between the positions decreases overall portfolio risk.

Seeking income in today’s environment provides opportunities and challenges. Get a better understanding of the landscape in this Rising Rate Report from NorthCoast’s Portfolio Management team.

With the outlook on equities weakening, Tactical Income reduced exposure to dividend-paying equities (DVY) and preferred stock (PFF) in May. Seeking “safer” yet attractive yields in the given environment, the strategy added exposure to emerging market debt (EMB) and muni bonds (MUB).

Tactical Income reduced exposure to dividend equities (DVY) and re-allocated to Emerging Market Bonds (EMB) and 10+ Year Credit Bonds (CLY). EMB valuation is attractive and sentiment signals, including economic surprise index and implied volatility, are ranked near the top of our fixed income investment universe. With a current yield of 4.1%, CLY remains attractive and our valuation signals (both yield and spread compared with treasuries with similar duration) are positive.

Tactical Income holds it current positioning (no changes in March) with the belief that the economy is improving and the default rate is likely to remain stable. HYG (High Yield Corporate) remains the top holding, as high yield bonds are generally less sensitive to interest rate hikes, which are foreseen in the future.

Macroeconomic indicators of leading business development and industrial production in emerging markets are improving. And with a relatively attractive yield in the position, the strategy added exposure with EMB.

Tactical Income took advantage of the Federal Reserve’s dovish outlook throughout the year and maximized exposure to higher duration and higher yield offerings which boosted performance. Positions in high-yield corporate debt, dividend equities, and real estate were a few of the top performers.

With the conclusion of the Fed’s QE program, interest rates remain highly sensitive. The strategy shortened its duration to protect against rising interest rates. The strategy added 10+ year credit (CLY) and short-term treasuries (SHV) ETFs while also buying Select Dividend (DVY) ETF to increase yield potential. CIU, SUB, and CSJ were removed from the strategy.