U.S. Equity ETF Portfolio Update
We want to bring our clients and their consultants current on the changes that we have made in the U.S. Equity ETF portfolio. The portfolio transactions have already occurred, as we always implement portfolio changes before we write about them or talk about them.
(1) We now have a cash reserve in the U.S. Equity ETF portfolio of over 20%. That was also instituted prior to the drafting of this commentary. Part of that cash may get committed with a quantitative signal and part may be committed on a portfolio management judgmental opportunity.
(2) We have maintained our heavy overweight position in the healthcare sector. That sector is approximately 14% of the S&P 500 Index weight, while our portfolio positions are approximately 27%, arrayed in the various elements and ETFs that reach broadly across the entire healthcare sector.
(3) We have raised the weight of portfolio monies invested in ETFs encompassing companies that address climate change. Those ETFs reach the solar and wind sectors, as well as water. Our rationale for increasing the allocation should be apparent to anyone who is following data and events reflecting climate change and its serious impacts, and the observed acceleration of climate change. Temperatures in the Arctic, for instance, are rising three times faster than temperatures in other places in the world, creating enormous dislocations (“Arctic warming three times faster than planet as a whole: research,” https://thehill.com/policy/energy-environment/554570-arctic-warming-three-times-faster-than-planet-as-a-whole-research). That was a discussion at Camp Kotok (held at Leen’s Lodge, Maine), and there will be a video of that discussion available.
We also want high exposure to the industries and companies which are involved in water. We need only to look around the United States and other places in the world to see what’s happening with water. (See, for example, “Why is America running out of water?” https://www.nationalgeographic.com/science/article/partner-content-americas-looming-water-crisis.) Our overweight positions in wind, solar, and water are likely to be in portfolios for some time. We continue to rebalance these positions on pullbacks and to alter portfolios to maintain the distribution among the three sectors as additional portfolio funds flow into the U.S. Equity ETF investment structures.
(4) We continue our overweight in the defense sector. The unfortunate, disturbing, and unexpected evolution of events in Afghanistan only reminds us of the need for ongoing defense-related expenditures by the United States. The U.S. defense industry is likely to be called upon to improve national readiness, to be prepared for the potential of war though we hope for peace instead. We see growing tension in the South China Sea and actions by the Beijing government that include repeated incursions into Taiwanese air space, along with other activities that remind us of the importance of defense for the United States. (See “PLA warplane enters Taiwanese military target zone minutes before drill begins,” https://www.scmp.com/news/china/military/article/3145430/pla-warplanes-enter-taiwanese-military-target-zone-minutes.) In addition, technological innovation will be reflected in the baskets of companies that we select in the defense sector.
To sum up, if you look at our U.S. Equity ETF models today, you will see over 20% cash, slightly under 30% in healthcare, and overweight positions in wind, solar, and water, and overweight positions in defense. Taken together, these allocations will total approximately three quarters of the U.S. Equity ETF portfolio. The remainders of the portfolios are arrayed in some special-sector ETFs, like semiconductors, and cash which could be deployed at any time. That’s part of a sliced allocation to the quantitative strategies, and that another slice of cash that could also be deployed in other sectors. Please note that these positions could change at any time and without any notice.
We run four quantitative strategies at Cumberland Advisors that utilize the same mathematical computational structure that is also used in the U.S. Equity ETF model. We would be happy to furnish you with additional information upon request. Just email me, and I will make sure that all relevant descriptive materials are forwarded to you.
David R. Kotok
Chairman of the Board & Chief Investment Officer
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