Reflecting on an H1 that saw continued exuberance in Q1 and a holding of breath ahead of rate cuts in Q2, ETF Stream’s portfolio of ETFs extended its lead over a conventional 60/40 allocation as the first half of 2024 drew to a close.
Some base case scenarios fell flat, with a revision of rate cut expectations stymieing longer-dated sovereigns and China’s equity recovery losing steam, however, ETF Stream’s US and Japan overweights shot the lights out through H1.
In fact, while a global 60/40 portfolio – comprised of the iShares MSCI ACWI UCITS ETF (SSAC) and the iShares Core Global Aggregate Bond UCITS ETF (AGGG) – returned 4.4% during the first half of the year, ETF Stream’s 2024 portfolio amassed a convincing advantage with 5.5% gains, according to data from ETFbook.
Bright spots
Although our equity bucket’s more than 60 basis-points (bps) lead over SSAC was narrower than our overall portfolio, some of our largest allocations continued their Q1 form in boasting the strongest returns across all our allocations.
Illustrating this, the joint-largest position at 20% – the JPM US Research Enhanced Index Equity (ESG) UCITS ETF (JURE) – retained its position as our second-strongest returning ETF, booking 16.9% gains.
Impressively, JURE extended its lead over the S&P 500 to 190bps so far in 2024, owing to its active ‘index-plus’ approach which applies over and underweights to S&P 500 constituents based on valuation and forward-looking earnings metrics.
Similarly, the third-largest equity allocation at 7% – the UBS ETF MSCI Japan UCITS ETF (hedged to GBP) (UB0D) – claimed the top spot in the performance rankings with booming 20.7% returns in H1.
Fund selectors and other overseas investors favour Japanese equities following corporate reforms which have supported returns for more than 18 months. However, despite the Bank of Japan implementing its first rate hike in 17 years, continued yen weakness means UB0D and other currency hedged Japan ETFs boasted more than 10% return advantages versus unhedged equivalents in H1.
The fixed income bucket of the portfolio remained in negative territory, but narrowed losses from -0.8% at the end of Q1 to -0.5% and crucially suffered less than half the negative return of AGGG.
Much like Q1, this advantage was led by the joint-largest allocation in our bond sleeve at 10% – the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01) – which posted resilient 2.5% returns in H1.
With a low effective duration of just 0.34 years, IB01 benefitted as markets repriced the number of Federal Reserve rate cuts from six to one by the end of the year.
On the reverse front, our 4% allocation to the iShares Core € Corp Bond UCITS ETF (IEAA) rose a conservative 0.6% following the first policy rate cut by the European Central Bank (ECB) in June.
Pain points
Unfortunately, while equal weighting has been a popular tool among fund selectors trying to overweight the US while avoiding mega cap tech, the joint-highest position in our equity bucket at 20% – to the Xtrackers S&P 500 Equal Weight UCITS ETF (XDEW) – deflated the gains of our US equity allocation with a sluggish 4.9% return.
In fact, while XDEW already lagged the S&P 500 with 7.8% gains in Q1, the ETF actually moved into negative territory in Q2, illustrating the size premium has yet to bear fruit despite resilience in the US economy.
This also owes to the above-forecast US core price inflation prints which caused the Fed to delay their rate cut timeline, which has kept borrowing costs high to the detriment of smaller companies and the property sector.
Reflecting this, our 3% allocation to the iShares Developed Markets Property Yield UCITS ETF (DPYA) booked the weakest performance through our equity bucket, with -4.1% returns in H1.
The unexpected hawkish turn by the Fed and a repricing of rate cut expectations at the start of the year also wrought havoc in our fixed income bucket, with continued US dollar strength seeing our 4.8% weighting to the SPDR Bloomberg Emerging Markets Local Bond UCITS ETF (SPFA) return -3.6% through the first half of the year.
The same trend had an even more pronounced impact on our joint-largest fixed income allocation at 10% – the iShares $ Treasury Bond 20+yr UCITS ETF (DTLA) – which booked -5% returns in H1.
However, there are some positive signs for duration in the US, with the probability of a ‘clean sweep’ Republican victory across the presidency and both US Houses in the November election likely to put pressure on the Fed to cut rates to provide fiscal headroom.
Reflecting this and in line with the increased market pricing of a Donald Trump victory, the loss on our 2% allocation to the Amundi US Curve Steepening 2-10Y UCITS ETF (STPU) narrowed from -0.7% at the end of Q1 to -0.2% at the end of the first half.