The ETF Portfolio Strategist: 30 July 2021

Portfolio Strategy Benchmarks

  • US Small-cap stocks rebound, but the outlook is still mixed

  • US bonds continue to edge higher as interest rate slip further

  • Equal-weight global asset allocation leads our strategy benchmarks this week—and this year!

Signs of life in small caps: For a second straight week, small-cap shares rallied. The iShares Core S&P Small-Cap ETF (IJR) rose 1.7% for the week (through July 30), posting the strongest gain for our standard global opportunity set.

This could be the start of a revival after two months of relatively weak trending, but we’re not on board yet. For starters, the trend profile for IJR still looks shaky. Although small-caps are outperforming large caps (VTI) this year, IJR’s performance in 2021 has been erratic. It doesn’t help that our in-house momentum indicator is in the gray zone for this fund. As shown in the table above, IJR’s MOM score is essentially neutral with a 60 print. That’s not horrible, but I’m inclined to stay cautious on the ETF for now. For details on all the strategy rules and risk metrics, see this summary.

Overall, it was a mixed week for asset classes on a global basis. Europe stocks had a good week — Vanguard FTSE Europe (VGK) rallied 1.0% and is posting a strong 90 MOM score, which suggests further gains are likely in the near term.

US bonds continued to rally, thanks to the persistent but slowing decline in interest rates. The benchmark 10-year Treasury rate again slipped for the week, dropping to 1.24%, close to the five-month low set earlier in the month. Yesterday’s substantially weaker-than-expected (but still strong) second-quarter GDP report helped prop up bond prices, and thereby drive down rates, albeit marginally.

In turn, iShares 7-10 Year Treasury Bond ETF (IEF) rose for a fifth straight week, closing near its highest level since February.

The deepest shade or red ink this week is concentrated in Asia stocks. The iShares MSCI All Country Asia ex Japan ETF (AAXJ) fell sharply this week, although the fund recovered a chunk of the losses from earlier in the week. Nonetheless, AAXJ closed down 2.4% at today’s close for the trading week. Year-to-date, the fund is in the red by nearly 2%. Even worse, AAXJ’s MOM score is a moderately bearish 30.

A mixed week for our portfolio strategy benchmarks: The varied performance run for asset classes spilled over to our standard set of strategy portfolios. On the top side: Global Beta 5 EW (G.B5.ew), our newly minted equal-weighted global strategy. Posting a 0.3% weekly gain, G.B5.ew delivered the only profit for the trading week for our portfolio benchmarks.

Note, too, that G.B5.ew is leading year to date with a strong 13.2% gain. Is 2021 the year when the long-suffering equal-weight global asset allocation strategy revives? It’s getting easier to think so with each passing week. ■