Most investors change their asset allocations as they approach retirement—but what about in response to market cycles?
Some tactical asset allocation strategies recognize that different assets and sectors shine at different points in the economic cycle. And by adapting a portfolio to these shifting tides, investors can enhance returns and mitigate risk. But, of course, these strategies can be difficult and time-consuming to implement in your portfolio.
3Fourteen’s SMI 3Fourteen Full-Cycle Trend ETF (FCTE) is a newly launched option helping investors take a more tactical approach to their asset allocations based on market cycles—using a strategy they call Full Cycle Trend (FCT) investing.
The Fund’s Strategy
The SMI 3Fourteen Full-Cycle Trend ETF’s fund managers select 20 domestic stocks from the S&P 500 index using their proprietary FCT strategy.
They apply a quality screen to narrow down potential opportunities and then apply trend and momentum screens to select the ETF’s portfolio during a given market cycle. Then, they rerun the screen every month to align the portfolio with prevailing market conditions.
The goal is to outperform the S&P 500 index across the entire market cycle by holding a highly concentrated portfolio of outperforming stocks.
A Diverse Portfolio
The SMI 3Fourteen Full-Cycle Trend ETF launched on July 2, 2024, so there’s not much of a performance track record yet. However, the fund’s portfolio offers some clues into what investors can expect from the strategy moving forward.
The roughly 20 stocks in its equal weight portfolio include a diverse set of names, ranging from Meta to Home Depot to Republic Services to General Dynamics. Currently, the highest sector allocations include consumer cyclical (30.24%), industrials (24.91%), technology (14.40%), basic materials (10.49%), and healthcare (10.19%).
Notably, 2024’s top performers like NVIDIA are missing from the list. And defensive sectors like utilities, energy, and real estate (REITs) have no allocations.
Costs & Cost Savings
Tactical asset allocation strategies typically have a high turnover since they’re not buy-and-hold investments. So, when investors execute the strategy on their own, it’s common to have a lot of short-term capital gains and high trading costs.
The SMI 3Fourteen Full-Cycle Trend ETF—and other ETFs executing these kinds of strategies—minimize these portfolio-generated capital gains, providing a significant cost savings compared to owning stocks directly.
Of course, the tradeoff is the expense ratio they charge for managing the portfolio. In the case of the SMI 3Fourteen Full-Cycle Trend ETF, this is a 0.85% net expense ratio, which is roughly in-line with other actively managed ETFs and lower than most mutual funds.
Alternatives to Consider
The SMI 3Fourteen Full-Cycle Trend ETF isn’t the only ETF to provide tactical asset allocations that change based on market conditions.
These ETFs are sorted by their YTD total return, which ranges from 1.9% to 16.9%. They have AUM between $2M and $118M and their expenses run between 0.67% and 5.39%. They are currently yielding between 0.10% and 5.60%.
| Name | Ticker | Type | Actively Managed? | AUM | YTD Ret (%) | Yield | Expense |
|---|---|---|---|---|---|---|---|
| VanEck Long/Flat Trend ETF | LFEQ | ETF | No | $26.5M | 16.9% | 1.3% | 0.92% |
| First Trust Dorsey Wright DALI 1 ETF | DALI | ETF | No | $118M | 13.8% | 0.10% | 1.07% |
| Arrow DWA Tactical Macro ETF | DWAT | ETF | Yes | $2.19M | 9.7% | 0.50% | 5.39% |
| Leuthold Core ETF | LCR | ETF | Yes | $79.1M | 6.7% | 1.5% | 0.94% |
| UPAR Ultra Risk Parity ETF | UPAR | ETF | Yes | $83.1M | 1.9% | 5.6% | 0.67% |
The Bottom Line
Tactical asset allocation strategies go a step further than typical asset allocations to adjust portfolios based on prevailing market conditions. While several ETFs offer these strategies, the newly launched SMI 3Fourteen Full-Cycle Trend ETF is a compelling option with a concentrated portfolio of 20 domestic S&P 500 index components.
