Legendary investor Martin Zweig coined the popular Wall Street maxim “Don’t fight the Fed,” and this rule has been working well. The S&P 500 returned 16% last year and over 8% already this year. Investors should think very carefully before fighting the Fed, let alone global central bank easing.
According to Sam Stovall, S&P’s chief equity strategist, the S&P 500 delivered an average annual return of 24% during years in which January and February were both positive. Also, over the 26 years in which this occurred, the S&P 500 total annual return was always positive. If you are still overweight cash, consider putting it to work!
Philip Carret was an investor and founder of Pioneer Fund, one of the first mutual funds in the United States. Carret ran the mutual fund for 55 years, during which time an investment of $10,000 became $8 million. That suggests he achieved a compound annual return of nearly 13% for his investors. Q1 2021 hedge Read More
ETF Trend Following
In many respects, listening to the Fed is a form of “Trend Following,” which is a leading investment strategy on Wall Street today. Trend followers delivered gains during the market crash of 2008 and they have provided important investment diversification for over 30 years. Still, trend following requires patience and discipline because it frequently underperforms indexing for years, between periods of extraordinary outperformance.
Given the tremendous growth in exchange-traded funds (ETFs) over the past 20 years, innovative portfolio managers have begun to offer trend following using ETFs. In ETF trend following, we have recently seen emerging markets, precious metals, and the transports all deliver surprises for investors.
Emerging Markets and Precious Metals
Emerging markets such as China (FXI), Brazil (EWZ), and the emerging markets basket (VWO), have all cooled off after delivering strong growth this past decade. The same goes for silver (SLV) and gold (GLD). Market trends change very quickly at times and ETF trend following rotates portfolio exposure as needed.
Financials, REITs and Transports
The trends in financials (XLF) and REITs (VNQ) are well known but the rise in the transports (IYT) is a surprise. Most investors don’t think of the transports for growth but IYT recently traded at levels over 8% above its peak in 2011.
ETF Portfolio Management (ETF PM) currently owns transports (IYT) in our active trend following portfolios. We also have exposure to REITs (VNQ) and emerging markets (VWO) through passive investable benchmarks. Our research concludes that investors should combine strategic multi-asset class indexing, with disciplined ETF trend following, to achieve diversification by asset class, and by investment process.
We were saddened to learn of Mr. Zweig’s death last month and our condolences go out to his family and friends. Mr. Zweig will be remembered and missed by many.
David S. Kreinces is the Founder & Portfolio Manager of ETF Portfolio Management (ETF PM), a revolutionary financial advisory firm that specializes in rules-based investing and risk control. He has over 20 years of professional investment experience in multiple asset classes and investment processes. He is an expert in ETF trend following and has successfully delivered gains in the market crash of 2008. ETF PM also gives back to the community through a pledge to donate a portion of each client’s annual advisory fee. See www.etfpm.com and www.InvestableBenchmarks.com.