April 12, 2022

In this month’s issue, we focus on the smaller, and lesser known ETFs featured in the undiscovered portfolio.

While asset allocation is a tried-and-true method for longer-term investing, you can boost your return with ETF trading. That’s what the undiscovered portfolio is designed to do.

With market volatility remaining, this portfolio gives you an opportunity to capture excess returns from asset classes outperforming the broader market.

Introduction

This month, I want to focus on the Undiscovered Portfolio, as the allocations in the strategic portfolios are remaining the same.

The Undiscovered Portfolio is so named because it consists of smaller or less-well-known funds representing various asset classes that are performing well on a technical basis.

This portfolio is tactical in nature, which means its components are traded on a more frequent basis than you’ll find in the Aggressive, Moderate and Conservative portfolios.

Tactical asset allocation shifts the percentage of assets in the different categories, allowing investors to capture relatively quick returns in securities showing technical strength. The Undiscovered ETF model aims to deliver a unique edge by focusing on a set of ETFs that are smaller, under-researched and remain largely unknown to the majority of individual investors

Smaller ETFs often represent good opportunities to invest in niche segments of the market that are either temporarily out of favor, or do not have large sales and marketing teams behind them.

The Cabot Undiscovered Portfolio is allocated into four tranches. There is a slot for a 40% holding, a 30% holding, a 20% holding and a 10% holding.

Below is the current allocation in the Undiscovered Portfolio.

Portfolios & Updates

Invesco Dow Jones Industrial Average Dividend ETF (DJD): This ETF tracks its namesake index, composed of dividend-paying equities in the Dow Jones Industrial Average, weighted according to their dividend yield over the prior 12 months. The advantage here is to capture dividends during a downward-trending or volatile market.

VanEck Morningstar International Moat ETF (MOTI): This ETF is based on the concept of the “wide moat,” or sustainable competitive advantage. This is a concept popularized by stock researcher Morningstar. Stocks in this category have historically generated excess returns relative to the broader U.S. stock market.

Direxion Daily S&P 500 Bear 1X Shares (SPDN): This fund seeks a return that is the 100% inverse of the S&P 500 index for a single day. Single inverse ETFs allow investors to either seek profit when a benchmark index is trading lower, or to apply a hedge for an existing portfolio position that they anticipate will show a negative return in the short term.

Invesco S&P SmallCap Energy ETF (PSCE): While you may be familiar with the large-cap S&P 500 energy sector, you may not have as much awareness when it comes to the small-cap energy names tracked in the S&P 600 index. This ETF measures overall performance of small companies engaged in the business of producing, distributing or servicing energy-related products, including oil and gas exploration and production, refining, oil services and pipelines. The average market cap is currently $3.789 billion, which is higher than the traditional definition of small cap, which tops out at $2 billion. However, recent strength in the energy sector has pushed the average market cap higher.

Strategic Allocations
The Aggressive and Moderate strategic allocations were updated in mid-March. There have been no changes to the Conservative allocation recently.

Remember, the purpose of the strategic allocations is to spread the risk while generating the return needed for a specific goal, such as retirement.

These portfolios are traded out at intervals, when the allocations become too far out of alignment with the established percentages.

Strategic portfolios trade infrequently, and that’s by design. In the coming months, as market conditions change, we will alert you to rebalancing trades, but at this time, there are no additional changes to be made.

While the broader market remains in a decline year to date, we’ll continue to monitor for necessary rebalancing as asset classes rotate in and out of leadership. With consumer discretionary showing renewed strength, we’re keeping an eye on allocations to determine whether that sector should eventually get a larger share of dollars assigned to it.

Remember: These trades are made strategically, and not based on stops or technical analysis; they are driven by our research and the investment corridors (allocation targets) and will trade less frequently than the Undiscovered portfolio.

The next Cabot ETF Strategist issue will be published on May 10, 2022.