Waterfall

Content provided by Scott Kubie, CFA, CLS Chief Strategist

The second quarter is off to an interesting start. International market performance continues to trend above domestic markets, similar to the first quarter. And, within international, emerging markets have outperformed so far.

How does CLS take advantage of these opportunities? In many portfolios, CLS uses a cascading approach: starting the analysis within a broad continuum and then narrowing the analysis within that continuum.

For example, on the Global continuum, CLS currently emphasizes international over domestic. This emphasis may lead to using a number of ETFs such as Global Diversified Equity (GloDE). This fund holds a 9% position in the Vanguard FTSE All-World ex U.S. ETF, which is allocated to only developed and emerging international markets. In the second quarter, international is about 3% ahead of domestic.

The analysis then cascades within the International continuum: developed compared to emerging. CLS currently favors emerging. GloDE includes a 3% allocation to the iShares Core MSCI Emerging Market ETF, among a number of other emerging market ETFs. Emerging markets are outpacing developed stocks by about 3% this year. Compared to domestic stocks, they are outperforming by 6.5% this quarter.

The final cascade is within emerging markets to analyze the regional allocation. Emerging Asia is about 0.5% ahead of the broad emerging markets index. In our example, GloDE doesn’t hold any ETFs targeting emerging Asia (regional ETFs are often illiquid). Instead, it uses iShares MSCI All Asia ex-Japan for just under 3% of its assets. This index is primarily invested in emerging markets, but it also includes two developed markets: Hong Kong and Singapore. It is about 0.3% ahead of the emerging markets index. All told, this final cascade is adding about 6.8% over domestic stocks so far this quarter. That’s a healthy amount of outperformance for 20 days.

Why not put everything in the final cascade? I’ll let you answer that one. A hint: Use the word “diversification” frequently.

Cascade Graphic

CLS is not affiliated with any of the companies listed above. While some CLS portfolios may contain one or more of the specific ETFs mentioned, CLS is not making any comment as to the suitability of these, or any investment product for use in any portfolio.
The graphs and charts contained in this work are for informational purposes only.  No graph or chart should be regarded as a guide to investing. The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies.
International investing is an investment strategy where investors chose global investment instruments.  International investing can be accomplished utilizing a variety of investment vehicles including, but not limited to, ETFs, American Depository Receipts, or a direct investment in a foreign stock exchange.  Diversifiable risks include, but are not limited to, political risk and currency risk. Emerging market investing refers to the practice of investing in a developing market of a foreign nation.  The pre-requisites of this practice include a market within the foreign nation along with some form of regulatory body.  Emerging markets involve greater risk and potential reward than investing in more established markets. Diversifiable risks for emerging markets include, but are not limited to, political risk, currency risk, and liquidity risk.
1613-CLS-5/4/2015