Eq: Total Market

Most investors would rather go to the dentist than take a look at their portfolios this year. 2022 has been a tough year for investors with both the equity and the fixed-income markets experiencing large drawdowns. Unless you’ve been all in on commodities this year, your portfolio has likely taken a hit.

This has been especially true for investors with large exposure to technology stocks. The Technology Select Sector SPDR ETF (XLK), which tracks the technology sector, is down 28% through October 21st. Out of the eleven SPDR Sector ETFs, only the Real Estate Select Sector SPDR ETF (XLRE) and the Communication Services Select Sector SPDR ETF (XLC) are down more.

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But who could blame an investor for a large technology allocation, especially with the way tech stocks had been performing over the last five years? Even during the last major selloff at the beginning of the COVID pandemic, the technology sector held up better than most sectors. However, this year, tech stocks have been anything but strong performers.

It’s not just technology either, all sector leadership has changed considerably over the past twelve months. At the end of the third quarter last year, consumer cyclicals, technology, and financials, ranked first, second, and third in the DALI sector rankings, while utilities, energy, and consumer staples ranked in the bottom three.

Fast forward to the third quarter this year, and energy, consumer staples, and utilities held the top spots, while technology, consumer cyclicals, and financials ranked in the eighth, tenth, and fourth spots.

Looking at the period between September 30, 2021, and September 30, 2022, a hypothetical equal-weighted portfolio consisting of the top sectors in Q3 2021, the Technology Select Sector SPDR ETF (XLK), the Consumer Discretionary Select Sector SPDR ETF (XLY), and the Financial Select Sector SPDR ETF (XLF) would have lost 20.06%, underperforming the S&P 500 by almost 3.5%.

But an equal-weighted portfolio made up of the top sectors in Q3 2022, including the Energy Select Sector SPDR ETF (XLE), the Utilities Select Sector SPDR ETF (XLU), and the Consumer Staples Select Sector SPDR ETF (XLP) would have gained 12.58% over the same period, outperforming the S&P 500 by more than 29% and the previous portfolio by 30%.

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That hypothetical difference of 30% reflects the cost of assuming that top sectors will remain at the top consistently. If instead, an investor followed a relative strength model and rotated with the market leaders, he or she would have likely been able to avoid those losses.

2022 is also notable as there is a nearly 80% year-to-date differential between the top-performing sector, the Energy Select Sector SPDR ETF (XLE), and the bottom-performing sector, the Communication Services Select Sector SPDR ETF (XLC), indicating that there is, even more, to be gained this year by picking the top sector and avoiding the worst.

The change in leadership and the large differential this year provides a useful reminder that long-term sector trends such as technology can change quickly and investors would benefit from the use of relative strength.

Tap into DALI sector rankings and access more investing tools with a 30 day free trial of Nasdaq Dorsey Wright’s Research Platform.

It’s no secret that many active fund managers fail to beat their benchmarks over the long term, but investor trading activity in those funds is even worse. A Morningstar examination of investor returns in the largest active bond funds revealed self-destructive behavior by investors. According to Morningstar, investors in the 20 largest Intermediate Core Plus Bond funds, which have 10-year records, were so bad over the last ten years that they gave up more return than the Bloomberg US Aggregate index delivered. The average fund returned 2.11% annualized for the last ten years ending in August, while the Bloomberg US Aggregate index returned 1.35% return. Surprisingly, every single one of the 20 funds outperformed the index, but investors were not able to take advantage of this outperformance. Investors lost 75% of the average return the funds delivered, ending up with an 0.53% annualized return. Poor timing can account for the dismal returns for investors. Between 2021 and 2022, investors added $91 billion to the category looking for extra yield over the aggregate index. Unfortunately, this coincided with inflation which led to intermediate-term bond prices falling.

Finsum: Investors poured money into active fixed-income funds at the worst possible time, leading to massive underperformance compared to the funds.

Put it this way: research analysts and model portfolios don’t go hand in hand. Meaning, of course, an analyst can’t provide model services, according to cskruti.com. Nope. None. Nada.

"I have been asked this multiple times by the advisers and my answer has always been “NO!”

In other words: zip.

But why, you might ask. Well, no buy/sell recommendation in a specific security exists, the site continued. While advice on a “portfolio of securities” is covered under Investment Advisers Regulations, that’s not the case under research analyst regulations.

Those existing research analysts dispensing model portfolios must alter the product offering and discontinue offering portfolios. What’s more, when it comes to a specific security where clients can determine the action on a specific security, analysts are able to provide buy/sell recommendations.

Further driving home the point, based on the terms of a settlement order passed by the Securities and Exchange Board of India in May, sebi-registered research analysts are unable to offer either the portfolios or advisory services, according to livemont.com.

It’s expected the settlement will have reverberations on the platform Smallcase. It offers investors curated portfolios and was created by research analysts and investment advisors.


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