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Tactical Asset Allocation: What You Need To Know


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What's Hot…and Not

How different investments have done over the past 12 months, 6 months, and 1 month. As of 3/16/18:

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Past performance is not indicative of future results.

Never before has it been easier for investors to invest in the strongest trends wherever they might be found in the world. Relative strength offers a disciplined framework for allocating among those trends. Markets are global and your portfolio should be too.

See disclosures in Appendix A, which includes the ETFs and Indexes used for this performance table.Performance numbers include dividends but do not include all transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

High RS Asset Class

High RS stocks, as an asset class, often move independently of broad indexes. As of 3/16/18.

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See disclosures in Appendix A.

Fund Flows

Total estimated inflows to long-term mutual funds and net exchange traded fund (ETF) issuance collected by The Investment Company Institute .

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See disclosures in Appendix A.

Sector and Capitalization Performance

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Past performance is not indicative of future results.

See disclosures in Appendix A.

High RS Diffusion Index

As of 3/16/18:

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The one day reading of this index fell to 16% on 2/8/18, but has since rebounded. The 10-day moving average is 71% and the one-day reading is 76%.

See disclosures in Appendix A.

Relative Strength Spread

The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. As of 3/16/18:

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Since April of 2017, the RS Spread has generally been rising, reflecting the outperformance of RS leaders vs. RS laggards.

See disclosures in Appendix A.

Global Macro: The Goal of a "Go Anywhere" Strategy

When it comes to building an asset allocation, investors have some decisions to make. Should they seek to be active/tactical or should they take more of a passive approach? The passive approach has some appeal because of its low maintenance and simple approach to diversification. However, asset classes can go through extended bull and bear markets that make a tactical approach more appealing.

We believe that there are 4 key reasons why investors would do well to consider making tactical asset allocation part of their portfolios:

1. Asset classes go through bull and bear markets. A relative strength-driven tactical asset allocation strategy seeks to overweight those asset classes in favor and underweight those asset classes that are out of favor.

2. Many investors can't handle the volatility associated with a buy and hold approach of investing solely in one or two asset classes. Tactical Asset Allocation has the potential to provide some diversification and help smooth out the ride.

3. From a client management standpoint, clients like to see how their portfolio is adapting to the current environment. Clients want flexibility and a tactical strategy seeks to objectively respond to market trends.

4. Markets are increasingly global. We believe an investor's portfolio should reflect the global nature of the markets by having the flexibility to invest in a broad range of asset classes, including U.S. equities, International equities, currencies, commodities, real estate, and fixed income.

Consider the following image, which I think can be applied to the financial markets. Many clients would like to believe that it is possible to enjoy a smooth ride towards their financial goals. They may look at the long-term returns of different asset classes and incorrectly conclude that they will earn those average long-term returns on a consistent basis. Unfortunately, there is much more variability in the financial markets. Asset classes can spend extended periods in or out of favor. While we are under no illusions that a tactical asset allocation strategy can completely smooth out the ride, we do believe that a tactical approach to asset allocation can bring a much needed element of risk management to the table.

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Nearly a decade ago, Nasdaq Dorsey Wright introduced our Global Macro Portfolio (available on a number of SMA and UMA platforms). This strategy was subsequently made available via the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT). We have been very pleased with how this strategy has performed over time. See below for FAQs on the strategy:

Systematic RS Global Macro Strategy

Frequently Asked Questions:

  1. What is the investment objective of the strategy? The strategy seeks to achieve meaningful risk diversification and investment returns. The historical correlation of this strategy to every major asset class has been relatively low over time. Our global macro strategy is uniquely positioned from an investment opportunity perspective because it is not limited to a specific market.
  2. What asset classes are represented in the strategy? The strategy is designed to invest in the following asset classes: Domestic Equities (long & inverse), International Equities (long & inverse), Fixed Income, Real Estate, Currencies, and Commodities. Exposure to each of these areas is achieved through ETFs.
  3. How are the investments selected? The strategy holds approximately ten ETFs that demonstrate powerful relative strength characteristics. The strategy is constructed pursuant to Dorsey Wright's proprietary basket ranking and rotation methodology.
  4. How is this different from strategic asset-allocation? We do not approach the asset allocation from a strategic standpoint. Instead, we implement a tactical approach. Our tactical overlay is designed to own the areas of the market exhibiting the greatest relative performance and avoid or use inverse funds for the weakest areas. You can expect the weightings to change over time! When, for example, domestic equities are performing poorly our tactical process will avoid or use inverse funds in these areas or favor an area with better relative performance, like fixed income. We make changes to the investment mix as markets and leadership change. The portfolio is designed to be quite responsive to emerging strength.
  5. How do all these processes come together? The investment strategy is 100% systematic. We have designed our processes to remove the portfolio managers' emotions and biases, which are detrimental to superior long-term performance.
  6. How is risk managed in the portfolio? Our investment process is designed to systematically rotate the portfolio into the strongest asset classes and individual alternatives within those asset classes. If an asset class is performing poorly the tactical asset allocation overlay will avoid or use inverse funds in that area and buy an asset class with better relative strength. There is a stop, based on the relative strength ranking, on each holding. The asset classes used in the portfolio are not typically highly correlated, so that our investment guidelines provide enough latitude to deliver solid returns in a variety of market conditions.
  7. Will the portfolio ever go to cash? Our investment universe includes ETFs that represent the shorter-term sector of the United States Treasury market. So, yes, we can effectively allocate a portion of the account to cash if that is where the best relative strength is found.
  8. Will you be investing in all of the ETFs? We have a rigorous process to determine what ETFs we will evaluate for our portfolios. There are many ETFs that are duplicative or not suitable for the investment strategy we are using in this portfolio, and we do not consider these for purchase in the fund. As new ETFs come to market we are committed to evaluating their investment merits and the effect they might have on our investment strategy. Any new ETFs will need to meet the same stringent criteria as existing ETFs for consideration in the portfolio.
  9. How can investors access the Global Macro strategy? There are three different ways that investors can access this strategy. It is available as a managed account on a large and growing number of SMA and UMA platforms. It is also the model used for the Arrow DWA Tactical Fund (DWTFX) and the Arrow DWA Tactical ETF (DWAT).

If you would like to receive the fact sheet for this strategy please call us at 626-535-0630 or send an e-mail to andy.hyer@nasdaq.com

Nasdaq Dorsey Wright is a registered investment advisory firm. Past performance does not guarantee future results. In all securities trading, there is a potential for loss as well as profit. It should not be assumed that recommendations made in the future will be profitable or will equal the performance as shown. Investors should have long-term financial objectives when working with Dorsey Wright. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon.The information contained herein has been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment. Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund ("ETF") prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. ETFs may result in the layering of fees as ETFs impose their own advisory and other fees. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov) The information contained herein has been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable ("information providers"). However, such information has not been verified by DWA or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made.Media Center

Powershares DWA Momentum ETFs

Arrow DWA Funds and ETFs

First Trust DWA UITs and ETFs

AdvisorShares

ALPS

Elkhorn Investments

Virtus Investment Partners

Dorsey Wright SMAs and UMAs

Dorsey Wright White Papers

Other Relative Strength Sources

  • Brush, John S. "Eight Relative Strength Models Compared." Journal of Portfolio Management (1986).
  • Berger, Israel, Moskowitz. "The Case for Momentum Investing." AQR Capital Management. 2009.
  • Jegadeesh and Titman. "Returns to Buying Winners and Selling Losers." Journal of Finance (1993).
  • O'Shaughnessy, James P. What Works on Wall Street. McGraw Hill, 1997.

Appendix A

The information contained herein has been prepared without regard to any particular investor's investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources believed to be reliable ("information providers"). However, such information has not been verified by Dorsey, Wright & Associates, LLC (DWA) or the information provider and DWA and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness of any recommendation or information contained herein. DWA and the information provider accept no liability to the recipient whatsoever whether in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which reference is made. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. You should consider this strategy's investment objectives, risks, charges and expenses before investing. The examples and information presented do not take into consideration commissions, tax implications, or other transaction costs. Each investor should carefully consider the investment objectives, risks and expenses of any Exchange-Traded Fund ("ETF") prior to investing. Before investing in an ETF investors should obtain and carefully read the relevant prospectus and documents the issuer has filed with the SEC. ETF's may result in the layering of fees as ETF's impose their own advisory and other fees. To obtain more complete information about the product the documents are publicly available for free via EDGAR on the SEC website (http://www.sec.gov).

The returns shown in the Sector and Capitalization Snapshot are price returns only.

1PowerShares DB Gold, 2MSCI Emerging Markets Index, 3DJ U.S. Real Estate Index, 4S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11Barclays 20+ Year Treasury Bond, 12S&P 500 Index, 13PowerShares QQQ, 14Dow Jones Industrial Average

"High RS Index" is a proprietary Dorsey, Wright Index composed of stocks that meet a high level of relative strength. The volatility of this index may be different than any product managed by Dorsey, Wright. The "High RS Index" does not represent the results of actual trading. Clients may have investment results different than the results portrayed in this index. Performance for both the High RS Index and S&P 500 is price returns only.

What's Hot...and Not Disclosures

The performance above is based on total returns, but does not include transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

High RS Asset Class Disclosures

The performance above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Fund Flows Disclosures

This example is presented for illustrative purposes only and does not represent a past recommendation.

High RS Diffusion Index Disclosures

The index above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Relative Strength Spread Disclosures

The index above is based on pure price returns, not inclusive of dividends or all transaction costs. This example is presented for illustrative purposes only and does not represent a past recommendation. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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