As you probably know, Astoria has been vocal about diversifying away from market cap-weighted indices for many years now. We have expressed that mid caps and small caps have some tailwinds with the interest rate cycle evolving in the past two weeks. Specifically, our point is that small caps needed a few rate cuts (or at least rate cut probabilities needed to be close to 100%) for them to work in earnest. If that wasn’t enough, we now have yet another treat for portfolio managers. Small caps are currently the second most negatively correlated to large caps in history (see the chart below).
In Finance 101, they teach you that in order to go higher up on the efficient frontier, one needs as many assets that are inversely correlated in a portfolio. Correlations between large and small are not only negative, but they are the second most extreme in history. This is a real treat for a portfolio manager.
Astoria’s ETF models have tilted away from market cap-weighted exposures for years. We are generally early in making shifts, but you generally want to be early than late when it comes to investing.
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