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07/24/14 05:04:12 PM
TECH KNOWLEDGE

A CREDIT DRIVEN GLOBAL ETF STRATEGY

While many of the ETF Asset managers we have profiled employ quantitative or momentum tools to identify the best ETFs, JA Forlines takes a different approach. ETF selections for its Global Tactical Allocation strategy stem from a top-down approach that emphasizes fundamental credit-driven research to identify economic trends.

John Forlines, the firm's Chief Investment Officer who spoke to S&P Capital IQ in June, said the team meets monthly to discuss global equity, global fixed income and alternatives to assess risks and opportunities. Tactical decisions are based upon determining the stage of the credit cycle and how that benefits certain sub-asset classes. For example, Forlines believes that the United States is positioned in the middle of the credit cycle, which may suggest sector-based investments offer the best opportunity. Comparatively, Europe is in the earlier stages so a more diversified approach is appropriate. Assets were recently spread across 11 ETFs with two thirds of assets in U.S. and international equities, though Forlines said the team considered 55-75 ETFs for possible inclusion.

Within the U.S, three iShares sector ETFs are held, including iShares Health Care (IYH 129 Overweight) which is the largest of the three ETFs. Forlines believes the U.S. health care sector is benefitting from demographic trends and offers growth at a reasonable price. Pharmaceuticals (46% of assets) and Biotechnology (20%) stocks make up the majority of IYH. The ETF ranks favorably to S&P Capital IQ for the relatively valuation and risks of its holdings, based on S&P Capital IQ STARS and S&P Capital IQ Quality Rankings. However, it has an expense ratio of 0.46% that is higher than other similar sector ETFs.

S&P Capital IQ ranks approximately 1,000 equity and fixed income ETFs based on a combination of holdings analysis and relative metrics at the ETF level. Our top ETFs receive an Overweight ranking.

The two other sector ETFs utilized by the Global Tactical Allocation were iShares U.S. Technology (IYW 98 Overweight) and iShares U.S. Industrials (IYJ 103 Overweight), which has a 0.46% expense ratio as well as provides high exposure to aerospace & defense (20% of assets), industrial conglomerates (16%) and machinery (15%) stocks. Forlines believes that industrials will be a beneficiary as global economies recover.

Indeed, infrastructure building was one of the key themes that resonated throughout the strategy, with PowerShares Build America Bond (BAB 26 Marketweight), within the fixed income allocation, and PowerShares Water Resources Portfolio (PHO 27 Marketweight) within the alternatives allocation. Despite PHO's name, Industrials represented 66% of assets compared to and the 18% allocation to Utilities. The ETF provides exposure to Industrial Machinery and Construction Machinery & Heavy Truck stocks that support water needs around the globe.

BAB, which has a 4.2%, 30-day SEC yield, holds investment-grade bonds that are issued by states and municipalities to support investment in toll roads, airports, etc. Also within the fixed income allocation is iShares U.S. Preferred Stock (PFF) and its 5.7% 30-day SEC yield.

Outside the U.S., one of the largest positions was iShares MSCI Europe Financials (EUFN 24 Marketweight). The ETF, which has a 0.48% expense ratio, trades with a tight bid/ask spread of $0.02. For EUFN, the United Kingdom (31% of assets) and Spain (12%) were the largest countries.

A smaller stake was held in iShares MSCI Australia (EWA 27 Marketweight), which Forlines said was a recent addition. He highlighted EWA for its exposure to materials stocks (18% of assets) and indirect play on Chinese economic growth. Other international holdings were in a diversified Europe ETF and a low volatility emerging markets ETF.

The allocation to cash was recently at 2% of assets, but was higher earlier in the beginning of 2014 and was as high as 30% in early 2012.

S&P Capital IQ ETF reports on these securities can be found on this platform. Visit http://www.jaforlines.com to learn more about the strategy.

 

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