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A Sector ETF Strategy That’s Not Afraid of Cash


The number of investment strategists offering portfolios comprised primarily of exchange traded funds to clients is on the rise.

Some prominent ETF strategists manage tens of billions of dollars, indicating the concept of all-ETF portfolios has taken off with investors, but one potential drawback is that these strategies are often fully invested.

“In light of the market volatility that we’ve seen thus far in 2014, some may want to learn from a strategy that has and will move more to cash when alternative ideas stop looking attractive,” said S&P Capital IQ in a new research note.

S&P Capital IQ highlights the example of BCM Diversified Equity Premium, run by Beaumont Financial Partners Capital Management, a Massachusetts-based asset manager that “recently held eight ETFs that offered a combination of select U.S. sector exposure, international equity exposure and non-traditional assets focused on water and gold. However, as of February, the strategy had 14% of assets in cash, as certain sectors and parts of the international market look unfavorable to management.”

Beaumont primarily focuses on the nine sector SPDR ETFs offered by State Street Global Advisors, but will rotate into comparable products offered by iShares, according to S&P Capital IQ. One of Beaumont’s recent additions is the Health Care Select Sector SPDR (XLV).

XLV is tussling with its utilities equivalent for top honors among the nine sector SPDRs in 2014. The largest health care ETF is rated overweight by S&P Capital IQ and has been driven higher this in large part to its 20% weight to biotechnology stocks. [Health Care ETFs' Soaring Popularity]

Another ETF in the BCM strategy is the $3.9 billion iShares U.S. Technology ETF (IYW), a fund that features one of the largest combined allocations to Apple (AAPL) and Google (GOOG) of any ETF.  Those stocks combine for 27.1% of IYW’s weight. S&P Capital IQ also rates IYW overweight.

Other ETFs currently featured in the BCM strategy, according to S&P Capital IQ, include the iShares Dow Jones US Industrial Sector Index Fund (IYJ), the iShares U.S. Basic Materials ETF (IYM) and the Financial Select Sector SPDR (XLF). XLF , the largest U.S. sector ETF by assets, and IYJ are rated overweight by S&P Capital while the research firm rates IYM marketweight.

XLF merits near-term consideration as the Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR) program is underway, meaning a significant percentage of the ETF’s holdings could announce increased shareholder rewards, including buybacks and dividends, early in the second quarter. Research firm Markit recently forecast a 25% increase in XLF’s dividend. [These ETFs Will Win on Higher Bank Dividends]

Financial Select Sector SPDR

Tom Lydon’s clients own shares of Apple and Google.