Top holdings of midcap and large-cap ETFs in NorthCoast Asset Management’s ETF portfolios soared to new heights in Q2. The firm navigated the prospects of inflation and the potential for interest rates to rise sooner than previously expected.
NorthCoast opened an energy ETF position during the quarter and upped its exposure to European equities. NorthCoast also remains optimistic on a real estate ETF it bought earlier in the year. Here are some highlights from its portfolios for the second quarter.
NorthCoast Sees Broad-Based Recovery
NorthCoast stayed allocated to U.S. large caps and midcaps through iShares Core S&P 500 ETF (IVV), iShares Core S&P Mid-Cap ETF (IJH) and Invesco S&P 500 Equal Weight ETF (RSP). These core positions extended their winning streaks against a backdrop of global economic expansion.
Patrick Jamin, chief investment officer for NorthCoast, breaks down the appeal of Invesco’s RSP. “The S&P 500 cap weighted (IVV) is really top heavy and tech heavy,” he said. “RSP is more diversified and will benefit from a broader based recovery. The top six names in the S&P 500 cap weighted (IVV) are up, on average, about 9% year to date while RSP is up 20% and IVV is up 16%.”
Jamin said NorthCoast expanded its stakes in iShares MSCI Eurozone ETF (EZU) as it saw the region catching up in the reopening and recovery. “We think European equities are relatively cheaper and under-owned versus U.S. equities,” he said. “On the Covid front we have seen new cases decrease significantly in the eurozone. The Goldman Sachs Lockdown Index in Western Europe has decreased from 63 at the beginning of May to just 28.2 in June. As we predicted, vaccination is ramping up and consumer sentiment keeps improving, so a European recovery play was something we needed to have in the portfolios.”
Bullish On Real Estate And Energy
NorthCoast slightly increased its allocation to Vanguard Real Estate Index ETF (VNQ) during the quarter. “It’s a very diversified way to get involved with real estate,” Jamin said. “We thought this was a great recovery play. We saw a lot of potential for appreciation and yield on top of that.”
Shares of VNQ have risen 22.7% so far this year and have an effective yield of 2.8%.
The energy sector piqued the interest of NorthCoast as a recovery play in Q2. The firm recently added Fidelity MSCI Energy Index ETF (FENY) to its Tactical Growth portfolio.
“Traditionally, Tactical Growth had been playing more regions versus sectors, but we thought we needed to be more granular in the circumstances,” Jamin said. “Crude oil prices have climbed from above $50 per barrel at the end of last year to stabilize above $60. Recently they reached above $70. OPEC comments on strong demand and a message of supply discipline were helping Brent crude make new highs post the pandemic.”
Increased Exposure To High Yield
In Q2, NorthCoast raised its exposure to high yield bonds for Tactical Income portfolio while being mindful of the potential for higher interest rates. Jamin added to the weighting of iShares Interest Rate Hedged High Yield Bond ETF (HYGH) during the quarter.
“We think the speculative grade default rate is going to fall as the economy continues to recover,” Jamin said of the holding. “HYGH is interest rate hedged so it tends to be long high-yield bonds, but short Treasuries of a similar maturity, which hedges against the risk of rising interest rates.”
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