An anti-tech stock market strategy for S&P 500 loss of momentum

It wasn’t long ago that an investor needed to do no more than bet it all on a tech-heavy S&P 500 Index and sit back and watch their portfolio grow, with names from Apple to Nvidia and Tesla on the march up and to the right. Those days are gone, and some managers have already adjusted, not selling out of stocks entirely, but giving up on the belief that the tech sector as a whole can quickly recover to lead every rally.

Katie Stockton, Fairlead Strategies founder, which runs the Fairlead Tactical Sector ETF (TACK), is among those more cautious equity fund managers. “We believe the loss of momentum behind the S&P 500 will stay with us for most of this year, if not also into next year,” she said in an appearance this week on CNBC.

The S&P 500 eked out a gain on Thursday, but finished the holiday-shortened week lower.

That’s led her TACK ETF to get more defensive, moving into sectors with a lower correlation to the index overall. TACK, which rebalances every month, can hold across all 11 S&P 500 sectors (it aims to hold eight total), as well as gold, and short-term and long-term treasuries. The ETF’s goal is to eliminate the three S&P 500 sectors that it sees as being at the bottom of the list for momentum and relative return potential, based on shifts its model identifies in the market. And if eight sectors don’t qualify, it can hold less.

Now is one of those times, Stockton said. After recently eliminating tech, TACK holds seven S&P 500 sectors, with small portions of its funds in gold and treasuries, the latter of which she said makes sense in what the firm expects to be a “prolonged bear cycle” lasting up to a year.

Make no mistake: TACK remains an equities market play, with 88% of its holdings in stocks. But Stockton is convinced that the tech stock issues won’t go away. TACK held tech from 2023 all the way through last month. “We rode that performance,” she said, though added it was done on an equal-weight sector basis, unlike the S&P 500, which saw the top tech stocks rise to more than one-quarter of the index weight. The ETF’s benchmark is the Russell 1000 Index, equal weight.

In periods when tech is the primary, or even sole source of upside leadership for the market, like it was in 2023, TACK is going to underperform the S&P 500. But at times like this, Stockton says, “it won’t let you down and it will let you sleep at night.” And she added this doesn’t mean not adding tech stocks more selectively outside the parameters of a broad fund. “They can go buy Netflix and Microsoft,” she said of advisors and investors building around a core tactical fund holding.

“We do see this as a cyclical down move in a secular bull trend,” she said.

Even for investors who don’t run their own portfolio on a tactical basis, the underlying premise is one they should understand and employ to some extent in the current market environment. Troy Donohue, BTIG head of Americas portfolio trading, appearing alongside Stockton on this week’s “ETF Edge,” said whenever there are pullbacks in the market, “investors will look at their portfolios and see where they can reallocate or rebalance to match goals.”

“The key is you shouldn’t have a static weight in any one asset class or region,” Stockton said. “It should be related to strength, whether that is price momentum as a primary input, or fundamentals or macro inputs,” she added.

Dotcom bust, 2008, and when a technical edge in the market matters

In volatile markets, technicians tend to turn a lot faster than your average investor or traditional fund manager, which happened during the dotcom bust and 2008, noted CNBC’s Bob Pisani on “ETF Edge.”

“When volatility goes up, demand for technical analysts goes up too,” Stockton said.

But she stressed that her model is underpinned by a belief in long-term investing and is not attempting to act on “intra-week market noise” that may lead to short-term market pain. “Emotional biases would get in the way of math-driven measurement of price momentum and relative performance, and overbought/oversold metrics,” she said. When the movements get significant enough to suggest major market change is underway, that’s when the opportunities exist on a tactical basis.

According to data from ETFAction, it is best to break down the tactical equity ETF universe into four buckets, all of which “rotate” between assets in one way or another:

• Cash Toggle – strategies that de-risk into cash or fixed income based on proprietary screens (generally when certain technical or volatility levels are breached).
• Sector – strategies that rotate across sectors/industries based on proprietary screens (e.g., TACK).
• Factor – strategies that rotate into different factors (value, momentum, quality, etc.) based on proprietary screens.
• Country – strategies that rotate into different regions/countries based on proprietary screens.

The interest in tactical is a subset of the larger ETF market move into active strategies as opposed to static index ETFs. Even if tactical funds are built upon models and indexes, the strategies have the goal of outperforming the core index. And active is doing very well this year in attracting assets, Donohue said. While it has attracted 30% of ETF flows, he says that understates the trend, because there are not nearly as many active ETFs overall (they represent 10% of all ETF assets under management). As a percentage of assets under management, “the increase has been notable,” he said.

Part of the popularity also stems from the rapid rise of active ETFs as an asset class favored by fund managers entering the ETF space. “Most launches of the past six years have been active,” he said.

Bonds going more active as well

It’s not just in the stock market where the active approach has taken off. Fixed-income tactical strategies are more prevalent in the ETF market as well. Recent “ETF Edge” segments have zeroed in on enhanced bond funds during a period of time when interest rate swings have been more severe than typical for the bond market.

Examples pointed to on “ETF Edge” this week were the SPDR SSGA Fixed Income Sector Rotation Strategy (FISR) and the WisdomTree Bianco Total Return Fund (WTBN), which can move between treasury durations, investment grade corporate bonds and high-yield issues, all in an effort to be more tactical and outperform the “AGG,” the Bloomberg Aggregate Bond Index.

On the fixed-income side of the markets, accessing the trading strategies of experts like Jim Bianco in an ETF structure can offer what’s typically been reserved for hedge funds or private products in a relatively low cost ETF, which also eliminates some of taxable consequences of more frequent trading. The net expense ratio of FISR is 50 basis points (0.50%), and for WTBN it is 59 basis points (0.59%). The iShares AGG ETF, by comparison, is three basis points (0.03%).

According to ETFAction’s analysis, many actively managed bond ETFs use a “tactical” strategy. That can come in a “core enhanced” ETF that covers many parts of the bond market but does not heavily tilt its underweights or overweight bets. Or through “multisector” ETFs, which make bigger overweight and underweight calls across sectors of the bond market, credit risk, and duration.

Compared to tactical equity strategies, the tactical approaches to bonds are proving far more popular and where a good part of the action has been this year in fixed-income ETFs. Tactical equity ETFs have taken in net inflows of $80 million this year, versus $11.3 billion inflows for the core enhanced and multisector bond ETFs, according to ETFAction.

None of this is “old school stock-picking” or star manager stuff, and there’s nothing novel in the attempt by managers to “go anywhere”, rather than “hug” an index in the effort to outperform the market. In decades past, stock stars like Peter Lynch of Fidelity Magellan could do it, while bond gurus like Bill Gross, during his Pimco years, and Jeff Gundlach of DoubleLine have won investors during past market cycles with a “total return” approach to bonds.

As the decades have passed, the long-term research has shown how difficult it is for active managers in both stocks and bonds (even more so in stocks) to beat their indexes. That hurdle will remain a high one.

But Donohue said during a year in which actively managed ETFs rose to $1 trillion in assets, and the inflows to ETFs are continuing this year despite the rocky markets, the biggest takeaway might be that 2025 is a year in which investors are realizing the tax efficiencies and intra-day liquidity advantages of ETFs.

ETFs are not just for building core portfolios and staying invested, he said, but for making the most of market cycles. “These are the times when tactical ETFs can differentiate themselves,” Donohue said.

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