NorthCoast Asset Management guided its ETF portfolios through a combination of macro headwinds in the first quarter.
The firm cut eurozone exposure due to the conflict in Ukraine and added a large cap value ETF. NorthCoast also bought shares of an international dividend ETF and kept a healthy dose of U.S. large cap ETFs in its portfolios. Here are some highlights from the quarter.
Seeing Promise in Large Caps For ETF Portfolios
iShares Core S&P 500 ETF pulled back to start the quarter on account of the Russia invasion of Ukraine and concerns of interest rate increases. The top holding in three of the NorthCoast ETF portfolios has since regained its footing.
"We believe the Fed tightening remains the most substantial headwind," said Patrick Jamin, chief investment officer of NorthCoast. "IVV still has upside potential with the U.S. economy normalizing from multiple Covid waves, the labor market tightening and strong consumer demand. We also think the Fed will be careful to try not to tank the stock market."
Jamin bought shares of the Schwab Fundamental U.S. Large Company Index ETF. "We think equal weighted and value are going to benefit from the Fed tightening," he said.
"FNDX uses fundamental screens like we use in our stock picking strategies. They are using sales, cash flows, dividends, buybacks and assigning a weight to U.S. large cap companies according to those metrics rather than using market cap. As a result, FNDX has a P/E ratio of 16.3 while the S&P 500 is about 21.6. You are getting stocks that are about 25% cheaper than the S&P 500."
Monitoring International Allocations
NorthCoast added iShares International Select Dividend ETF to its Tactical Income portfolio in the first quarter. "It is investing in stocks of large and mid-cap developed international markets of high-dividend paying companies that are expected to continue to pay and grow dividends," Jamin said. "You are getting a combination of value, quality, safety and a little bit of growth at the same time."
Jamin reduced stakes in iShares MSCI Eurozone ETF citing risk of dependence on Russian imports. "Europe is relying on Russia for more than energy," he said.
"There are metals, chemicals, agricultural products and fertilizers that are imported from Russia and in some cases from Ukraine. A recession in Europe is not our base case. We are more optimistic than the market has been, and we see the pullback as a potential opportunity to maybe get back into EZU."
High-Yield Plays For ETF Portfolios
NorthCoast held VanEck High Yield Muni ETF as a top position for Tactical Income. "State governments have had better-than-expected debt collection and massive federal aid," Jamin said. "Historical evidence has shown that high-yield munis tend to outperform in rising rate environments. HYD also has a strong tax-exempt yield of 3.6% and is well-diversified across industries and states."
The firm is using iShares Interest Rate Hedged High Yield Bond ETF to guard against interest rate risk.
"It neutralizes the impact interest rate hikes can have on traditional bonds by shorting an equivalent duration of government bonds," Jamin said. "Year-to-date, HYGH is down about 1.5% while high-yield non-hedged bonds are down about 5.5%. This is a very big difference in terms of performance in less than three months."
