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Introducing ETF models and a concentrated equity Buy list
Beat the Bench is off from its normal publishing schedule this week, but I promised some exciting announcements, and now is the time to make it official!
Starting next week, Beat the Bench is introducing two ETF models as well as a Concentrated Equity Buy List.
The ETF models will replace the generic “Balanced”, “Global Equity” and “Sector” allocations seen in each Monday Morning Playbook so far, and transition to a once-a-month cadence.
The Concentrated Equity Buy List will highlight 10 stocks I believe can outperform the S&P 500 and be provided in the first edition of Stocks: The Good, The Bad, and The Ugly each calendar month.
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Why the changes?
Launching Beat the Bench in the middle of a bear market has been a blessing and a curse. On the positive side, I’ve been correctly preaching caution and defensive positioning, something many investors haven’t heard enough over the past 12 months from their usual sources.
However, I know that most financial advisors aren’t out there shorting stocks. And having an equity report go out and say short this, or all these stocks are going lower has felt unhelpful at times. I hope that calling out weaknesses in mega-caps has been valuable to some degree, but I know many of you are simply interested in long ideas. The Concentrated Equity Buy List will allow me to provide high-quality stock picks while maintaining the integrity of the broader macro call.
As for the ETF models, I think the value proposition is pretty simple. Those of you that know me from my previous role know that beating the bench is something I consistently delivered on. Not just in this year’s bear market, but on the way up as well. That’s the value of technical analysis. No narrative, no fundamental story to stick to, no politics. Just know what you are trying to accomplish and follow the price. These models will take the guesswork out for you and allow me to show you exactly how I would manage ETF models with two of the most common benchmarks out there.
Below are some more details on how exactly things will work.
ETF Model Primer
Beat the Bench will provide two ETF models going forward, with the explicit goal of outperforming:
The S&P 500
The traditional 60/40 portfolio (60% S&P 500, 40% US Aggregate Bond Index)
Trading Cadence: The models will be updated on the first Monday of each calendar month, with updates provided in that week’s edition of The Monday Morning Playbook.
Rationale & Supporting Evidence: Supporting charts for changes to the model will be provided for any trades. I will also issue a separate video to streamline the experience for readers who may be interested in only the models or normal macro content.
Performance Calculations/Disclosures: Performance is hypothetical and no claim is being made to the accuracy of returns. Performance will be calculated using total return data from Optuma and based on the returns of closing prices each Monday. A spreadsheet detailing that performance will be made available to all, but again is hypothetical and for general information purposes only. Performance does not account for fees, trading costs, taxes, or anything else that could affect real-world returns.
Number of Positions: 10-20
Position sizing and cash: 3% minimum position sizes. The portfolio will also hold a minimum of 2% cash at all times to account for advisory fees.
Out of Benchmark Bets: Key to my investment philosophy is understanding how to place bets and structure technical trades within portfolios. At the center of that is the benchmark. I have chosen to forego benchmarks with international equity or commodity exposure because, in my experience, end clients simply do not care about how silver or Japanese banks perform in a given year. They care about the S&P 500. International equities and commodities are eligible for inclusion in the models, but as out-of-benchmark bets, the bar is higher and we will need to see attractive risk/reward in the relative charts before they are included.
ETF Product Restrictions: No leveraged or inverse products will be used. However, commodity ETFs, including those that issue K-1s, may be used in rare instances. Preference will be given to the largest and most popular ETFs to account for volume and liquidity.
Asset Allocation Restrictions: The stock and bond allocations will not deviate more than 20% from their benchmarks. Meaning, the minimum equity exposure for the Beat the S&P 500 model will be 80%, and the equity range on the Beat the 60/40 model will be 40%-80%.
I know this is an area where many advisors share opposing viewpoints, but I believe this strikes a balance between what can be a significant value-add (or risk) in terms of performance while still maintaining a relative connection to an asset allocation or suggested benchmark that may be generated from a financial plan. Positioning within those equity or bond allocations is unrestricted and may tilt as aggressive or conservative as I see fit.
Concentrated Equity Buy List Primer
The Beat the Bench Concentrated Equity Buy List is a running list of 10 stocks each with the goal of outperforming the S&P 500. The relative performance is key because as a top-down shop, I believe there are environments conducive to stock picking (bull markets with broad breadth) and environments that are not (2022). However, this list aims to distill top ideas for long-only investors who want long ideas regardless of the market environment.
Cadence: The Concentrated Equity Buy List will be published on the first Thursday of each month in our individual equity report, Stocks: The Good, The Bad, and The Ugly. Stocks will remain on the list until the next month’s update, at which point every stock will be either reaffirmed or sold.
Supporting Evidence: The Buy thesis will be shown for each stock in the monthly update. Any stocks sold or removed from the Buy list will also be highlighted.
Number of Buys at any one point: 10.
The Universe: Our stock universe is limited to stocks within the S&P 500, Nasdaq 100, or Dow Jones Industrial Average.
Restrictions: No more than 3 stocks from any one sector on the list at one time. While each pick is independent and the list is not intended to represent a diversified portfolio, because of the importance of my top-down work, I don’t want all the stock picks coming from one sector. This provides a loose guardrail in that regard.
Performance: Performance will be shown each month for each stock pick from the time it was added to the list. It will also be shown relative to the S&P 500 over that time period. All “Sells” or previous stocks on the Buy list will stay on a spreadsheet that can be referenced over time, showing the final performance for each trade, whether the stock was a winner or loser.
I’m super excited about these changes and hope you are too! Know somebody that may be interested in these upgrades? Let them know using the link below:
Thanks for coming along for the ride and see you in 2023!
Happy New Year!
Scott Brown, CMT
Founder and Chief Investment Strategist, Beat The Bench LLC