We Added a Sector Tilt to our Foreign Dynamic Tilt (November 2020)

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As most clients and readers know, we have been revisiting our asset classes, running efficient frontier analysis to confirm that we still have the long-term historical returns to justify our investment decisions. This analysis is what helped us to tilt more towards Healthcare and Technology while adding Consumer Staples and Biotechnology to U.S. Stock allocations, as well as help us to remove our Energy overweight from our Resource Stock allocations.

When reviewing our Foreign allocations, we discovered that the sector of foreign Healthcare has outperformed in a risk-adjusted manner the other foreign sectors we were reviewing. While we considered adding a Foreign Healthcare sector to our foreign allocations and may still do so in the future, there are several barriers to making that change today.

First, there does not currently exist a low-cost foreign healthcare ETF or mutual fund. There only exist global healthcare funds with a higher expense ratio than our domestic healthcare fund, Vanguard Health Care ETF (VHT).

Second, there is no easy way to tilt away from the unfree countries and towards the free countries when using a foreign fund. However, we have reason to believe that the economic freedom of a country is a factor which contributes to higher performance.

Third, the top foreign healthcare holdings from free countries of global healthcare ETFs are the same top holdings as the country-specific funds we are already investing in.

We also found that foreign Financials have underperformed in a risk-adjusted manner most of the other foreign sectors we were reviewing, and have reason to suspect that the exposure we have to Financials in our Freedom Investing strategy may be underperforming the other industries.

To integrate some of these findings while still maintaining our Freedom Investing strategy, we elected to add a sector tilt to our dynamic tilt formulas. Now, we are tilting away from countries with large Financials exposure and toward countries with large Healthcare exposure.

Right now, this effectively means tilting towards Denmark, New Zealand, and Switzerland and away from Canada, Hong Kong, and Singapore.

In the long-run, we see this strategy of tilting our foreign allocations by their sector allocations as a temporary measure and hope to implement a new strategy that more accurately captures the findings we believe to have found.

However for now, we hope this small increased exposure to foreign healthcare will help capture some of the efficiencies we believe to have found.

Photo by André Lergier on Unsplash

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Chief Operating Officer, CFP®, APMA®

Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.