Our International ETF strategy analyzes fiscal and interest rate policy and complements that research with trading analytics to determine portfolio risk/reward and valuations. The strategy has the benefit of flexibility in allocation by market cap size and developed vs. emerging markets.
Solid demand for foreign equities continued throughout Q3. Both developed and emerging markets advanced, with Europe and Latin America leading the respective moves. Market cycles will eventually wring out supply at underweight levels, and that appears to have created a coiled spring effect in international stocks as each mild pullback has been met with strong demand. Our previous notes focused on the similarities between the 2015-2016 loose, global monetary policy and the post-financial crises Fed policy moves. Capital tends to flow to asset classes that offer reasonable opportunities for a return on investment. With many foreign equity markets offering dividend yields at 2X to 3X the yield of their respective 10-year bonds, demand has been created.
Developed Markets (60%): Solid quarter across the EAFE names, with small cap continuing to lead the charge. Although the USD has recovered from its Q2-Q3 weakness, we do not feel inclined to hedge our equity positions at this time. While it is important not to let currency markets dictate positioning, we will continue to monitor the USD vs. euro and yen.
Emerging Markets (35%): Demand driven by broad asset allocation shifts continues to benefit emerging markets. Our Latin America positions had very strong runs as we were rewarded for adding exposure into the Brazilian political sell-off in May. It will be important to observe whether the late Q3 relative strength in the developed markets vs. emerging markets continues.
Cash (5%): Fairly low level for our strategy, as we focus much of our work on risk and let the upside take care of itself.
Matthew McAleer
Managing Director & Portfolio Manager
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