EB Model ETF Portfolio DRAFT - Selections and Entries

Tom Bowley - April 23, 2024

My Quick Take

I've been looking at lots of charts and reviewing my longer-term signals that point to a continuing secular bull market, despite the recent noise with higher interest rates and potentially higher inflation. I do NOT believe we're in the midst of a deep correction nor a bear market and so I want to draft ETFs accordingly, with a primary focus on aggressive areas of the market.

Key Themes

I spoke about themes last week at the Model ETF Portfolio DRAFT event, pointing out the higher interest rates, stubborn inflation, value over growth (recently), etc. My signals are suggesting these current themes will not last throughout the next 90 days. Given the historical performance of growth stocks from May through August over the past 12 years (during the current secular bull market), I believe it's prudent to overweight growth in the upcoming quarter, believing that interest rates will settle back down and any upward movement in inflation is a blip. I certainly could be wrong, but I like to invest with conviction, not waffle back and forth. I'm not overwhelmingly confident that the current weakness is over. Even a bounce could be the "B" in an A-B-C bull market correction. If true, look for perhaps a bounce to test the now-declining 20-day EMA before one more leg lower. Beyond that, I see brighter market skies. And maybe this is simply a "V" bottom and we head right back up to the prior highs. Either way, I'd rather be more aggressive vs. more defensive over the next 90 days.

I look for a significant rebound in technology, which makes sense, given what technology historically does:

The XLK outperforms the S&P 500 by 4.7% from May through August, while outperforming by 3.1% the other 8 months. Clearly, we're approaching the historical sweet spot for the XLK.

Internet stocks ($DJUSNS), part of communication services (XLC), also love the period from April through August:

In the case of internet stocks, they have outperformed the S&P 500 by 7.4% during the April to August period. January is obviously strong too, outperforming by a average of 3.7% over the past 12 years and during this secular bull market. The other 6 months, however, average underperforming by 2.5%.

Technically, the XLK is slightly beneath its 20-week EMA, but the DJUSNS is well above it and has remained strong during this downtrend. These are areas that deserve overweighting over the next 3 months.

We're also planning to overweight industrials (XLI). While its relative strength vs. the S&P 500 during the upcoming May through August period isn't as solid as the XLK or DJUSNS, it barely underperforms historically and, technically, it's been the 2nd best sector since that October low, trailing only financials (XLF).

The DRAFT Picks

After considering the above, reviewing the charts of all Strong ETF ChartList (SETFCL) ETFs, and also looking at the Top 10 Holdings for concentration/diversification and technical outlooks, I decided on the following ETFs to be included in the upcoming Model ETF Portfolio. These ETFs, for our purposes, will be bought as of today's close and held until July 19th, at which time they will be replaced by the next Model ETF Portfolio. Here they are:

Capital Group Growth ETF (CGGR): 20% weighting
Global X Artificial Intelligence & Technology ETF (AIQ): 10%
Capital Group Dividend Value ETF (CGDV): 10%
First Trust Dow Jones Internet Index Fund (FDN): 10%
iShares S&P Mid-Cap 400 Growth ETF (IJK): 10%
JPMorgan U.S. Quality Factor ETF (JQUA): 10%
First Trust NASDAQ Rising Dividend Achievers (RDVY): 10%
Technology Select Sector SPDR Fund (XLK): 10%
iShares Transportation Average ETF (IYT): 5%
VanEck Vectors Semiconductor ETF (SMH): 5%

After these selections and according to our ETF Analyzer Spreadsheet, here are the percentage allocations of our Model ETF Portfolio ETFs amongst the 11 sectors (weighting in S&P 500 in parenthesis):

Technology: 38.15% (29.59%)
Consumer Discretionary: 10.46% (10.35%)
Communication Services: 10.05% (8.93%)
Industrials: 15.50% (8.80%)
Financials: 9.07% (13.14%)
Health Care: 7.02% (12.43%)
Consumer Staples: 2.41% (5.94%)
Real Estate: 0.81% (2.28%)
Utilities (XLU): 0.79% (2.20%)
Energy (XLE): 3.32% (3.97%)
Materials (XLB): 2.43% (2.37%)

Remember, for our tracking purposes, we will enter all ETFs at today's closing price. Consider the upcoming Model ETF Portfolio to be "quite aggressive", focusing on growth over value. If recent market action continues, which has favored value over growth, or if inflation becomes a bigger problem than I'm anticipating, our Model ETF Portfolio will likely lag the S&P 500, perhaps significantly so.

Happy trading!

Tom