Mid-Year Rebalancing Ideas: Part 1

by Wayne Ferbert on June 10th, 2013

The mid year is here – and June represents a good time to consider your portfolio for re-balancing opportunities. June is particularly convenient for the Buy & Hedge investor because we use quarterly options to typically ladder our hedges.
 
So, you might have some June puts expiring and will need to reset the protection for roughly 6 to 9 months from now.
 
But before we get in to adjusting hedges, you should consider whether your portfolio has gotten out of balance due to any sectors or categories that have over- or under-performed.
 
In other words, you need to know what you want to own before you know what you are going to hedge. So, we’ll examine some ideas for re-balancing today – and look at ways to restructure your hedges in part 2 tomorrow.
 
Looking back at the last 5 months, we have seen some relative out-performance in a few sectors: notably Financials, Healthcare, and Consumer Discretionary. The lagging sectors have been Technology, Materials, and Utilities.
 
Idea #1: But, we still like Energy the most – and so does Morningstar. It is the only S&P 500 sector to get a 5-star rating for its ETF. While we still like Financials, we think you can take some of that profit off of the table and roll it in to Energy or other under-weight categories. The XLE is one of the largest Energy ETFs that investors can use.
 
On the International front, Emerging markets have actually been negative for the year and developed markets are up. In fact, Emerging markets are down 6% and Developed markets are up 6% YTD.
 
Idea #2: We think you can consider rolling any over-performing investment in to more emerging markets – especially any US equity position. We think you should consider maybe increasing your International concentration by 3-5%. And if you can’t stomach that kind of increase, then at least roll some of the Developed Country profits in to Emerging Markets on this buying opportunity. The EEM is the largest Emerging Markets ETF.
 
Lastly, while the Real Estate market has had a nice 2-year run up, it has pulled back 10% in the last 2 weeks alone. This might represent a nice buy on the dip opportunity. And Real Estate tends to be less correlated to the broader stock market.
 
Idea #3: Invest between 4-7% of your overall portfolio in Real Estate ETF – such as IYR, VNQ, or FTY. You can fund this allocation by selling some of your broad US stock allocations or sector allocations that have been winners.
 
So far this year, for the most part, all boats have risen with the tides. When you look at Large Cap US Equity versus Mid-Cap or Small Cap, you find the YTD returns have been +17%, +18.5%, and +20%, respectively. This is not the kind of relative out-performance that is going to create a rotation opportunity between these three categories.
 
However, we like the idea of taking any money off of the table from these three big US Equity winners and investing in Energy, Emerging markets, or Real Estate. 


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