State Street Rebalance of Active ETF Models Hint at Caution

Trying to make sense of the latest data seems to always land us in the same debate over whether good news is actually bad news, or bad news is actually good news for markets.

It’s certainly a challenging time to be an investor, especially given the high levels U.S. equities are trading at. It’s probably why a call for caution and diversification seems to be getting louder.

As an allocator or as an investor, what do you do? Do you keep betting on growth because it keeps delivering against all odds? Do you revisit style and size decisions going forward? Or do you look internationally and take on more duration at this point?

There’s no one-size-fits-all answer, but we can take some clues from what big asset managers are doing.

Last week, my colleague Todd Rosenbluth covered BlackRock’s latest changes to its model portfolios. The gist of their tinkering: BlackRock is leaning into U.S. growth.

“As part of a rebalance, the ETF models leaned more heavily into stocks than bonds than before. According to BlackRock, the team increased to a 4% overweight in stocks relative to bonds, highlighting a supporting macroeconomic environment,” Rosenbluth wrote.

It looks like BlackRock remains bullish on earning growth and the U.S. economy. That said, the firm also made two other interesting moves. It increased its focus on quality fixed income positions, looking for “healthy balance sheets” in corporate debt. And it expanded its exposure to international stocks, especially emerging markets.

This week, State Street Global Advisors announced the rebalance of its Active Allocation ETF Model Portfolios. The allocation adjustments tell us something about how State Street is feeling about the opportunity set, which suggests diversification is a theme.

The first thing we notice when we look at the rebalancing is the firm’s leaning into foreign equities. Across all six of its active allocation ETF models, State Street increased positions to international stocks through the SPDR Portfolio World ex-US ETF (SPDW B+). Here’s what that looks like:

• Conservative — allocation to SPDW increased by 120%. It more than doubled from a small allocation. It now represents 5.5% of the overall portfolio.
• Moderate Conservative — allocation to SPDW increased by 50% to represent a 9% weighting in the portfolio, the second largest equity position in a mix led by a 22% allocation to the SPDR SSGA Fixed Income Sector Rotation (FISR ). 
• Moderate - allocation to SPDW increased by 26% to represent 14.5% of the total portfolio. It’s the second largest position behind the SPDR S&P 500 Trust (SPY A). 
• Growth Portfolio — allocation to SPDW increased by 8% to represent 20.5% of the portfolio. That’s the second largest position behind only SPY. 
• Moderate Growth — allocation to SPDW increased by 20% to represent now 18.5% of the overall mix. It’s the second largest position behind only SPY, at 22.25%. 
• Maximum Growth — allocation to SPDW increased by 5% to represent 20% of the total portfolio. That’s the third largest position behind only SPY and the SPDR SSGA US Sector Rotation USD (XLSR B). The latter is a sector rotation mix that is currently 42% tied to technology.

SPDW, which is a market-cap-weighted portfolio of developed ex-U.S. stocks, holds Japan, U.K. Canada, France, and Switzerland as its biggest country allocations. It has names like Novo Nordisk, ASML Holdings, Nestle, Samsung, Toyota, and AstraZeneca among top holdings. Here’s a glance at the fund’s sector breakdown, which notably is led by financials and industrials, not technology:

A look across State Street moderate-to-conservative active allocation ETF models also shows a trimming to two defensive-type assets. One is a cashlike position; the other the ultimate safe haven: the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL A-) and the SPDR Gold Shares ETF (GLD B). The position adjustments were identical:

• Moderate: allocation to BIL was cut by 50% to represent only 3% of the portfolio. The allocation to GLD was trimmed by a third to 2%.
• Moderate Conservative: allocation to BIL was cut by 50% to represent only 3% of the portfolio. The allocation to GLD was trimmed by a third to 2%.  
• Conservative: allocation to BIL was cut by 50% to represent only 3% of the portfolio. The allocation to GLD was trimmed by a third to 2%.

Across the growth suite, allocation to short-term debt was also trimmed. But bets on gold remained unchanged.

• Moderate Growth: allocation to BIL was cut by 50%, while GLD’s position remained unchanged.
• Growth: allocation to BIL was but by 25%, while GLD positions stayed unchanged.
• Maximum Growth: allocation to GLD remained unchanged. The fund does not invest in BIL.

As short-term debt and gold gave up some ground, duration found its way in.

In Moderate Growth, a 3% allocation to the SPDR Portfolio Long Term Treasury ETF USD (SPTL B-) was added. That’s a new position.

SPTL is also a new addition across the moderate and conservative suite of models (moderate, conservative, and moderate conservative). All of those now have a 3% allocation to the ETF added in this latest rebalance.

Other position adjustments were peppered throughout the rebalance, including some trimming to SPY and small-cap stocks in some portfolios. There was also a lightening of allocations to aggregate bond positions in exchange for a bet on credit through junk bonds.

In all, we could argue that this latest rebalancing of active allocation model portfolios suggests State Street remains positive on U.S. equities. But it’s also heeding the call for caution through additional international equity exposure, a turn to credit opportunities, and the addition of duration to most of its portfolios.

In a market where good news can be bad news and bad news can make your day, market participation with diversification is looking like a popular way forward as we head into midyear outlook season.

For more news, information, and analysis, visit  VettaFi | ETFDB.