Recapping Market ETF Performance in 2013: Part 2

by Wayne Ferbert on October 17th, 2013

So we showed in yesterday’s blog that asset class performance in 2013 has really all over the board compared to the 2012 results that were all very tightly clustered.
To recap, in US equities we have seen small cap outperform mid-cap which has outperformed large cap. And all of these US equity groups out-performed international equity indexes. Interestingly, within International, we saw the developed markets materially out-perform the emerging markets.
What does that mean for 2013 so far?

It means that if you had an investment thesis in a specific sector or category - and you exercised that thesis - then you likely also showed real divergence from market returns. In other words, you are likely either materially out-performing the market or under-performing the market returns this year.
Lots of investors are seeing a real performance divergence from the S&P 500 – some good and some bad. If you are a stock picker, this has been a good year to ‘express an opinion’ as many stocks have shown materially under- or over-performance. You want to see that divergence if you like to 'pick the winners'.
The good news is: most categories in the equity side have at least been positive in 2013 – so at least even if you expressed an opinion that didn’t out-perform the broad market index, you probably still made money.
What does this mean going forward – in both the tactical short term and strategic long term?
In the short-term, if you are looking to get defensive and acquire more hedges or strengthen your hedges or just replace expiring hedges, you could consider buying hedges on this year’s best performers. When markets run up, the best performers tend to lead the way back down if there is a correction.
Small cap and mid-cap US equities have been the big winners in 2013 – and especially in the last 3-4 months. So, you could consider putting on your hedges for a broad portfolio with these specific index ETFs: IWM and MDY.
In the long-run, if your outlook is long-term (as it should be), then the recent run-up and new highs present an opportunity to re-balance. The relative performance differences are quite material – and whenever we see that, we can take the opportunity to re-balance.
Note: if you re-balanced earlier this Spring or Summer, I would recommend waiting. But if you didn’t when we recommended earlier this year, then your relative difference in performance between asset classes will be material. And I recommend you look to re-balance.
In particular, the biggest winners to sell are the small cap and mid-cap US equity categories. Then, the under-performers to rotate in to are both International categories – and if you have the guts for it – the Emerging markets category has been the biggest under-performer so you would use the gains from the other categories to buy more Emerging Markets.
Make sure you adjust your hedges accordingly after you re-balance.
Good luck!

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