How We're Re-Equitizing

 |  Includes: EMIF, PHO, SPY, XLI
by: Roger Nusbaum

Over the last couple of weeks I've disclosed a couple of trades we've placed for our large accounts that started the process of moving toward being fully invested. Yesterday we executed trades for most of our small and mid sized accounts with the same goal in mind.

Large account are ones where we believe using mostly individual stocks is suitable. This is usually a function of account size. If there were no trading costs then we could put 40 positions into any sized account. In mid sized accounts we still build the portfolio at the sector level using mostly ETFs but include a small number of individual stocks, and with small accounts we use mostly broad based funds in an effort to capture weightings to foreign versus domestic, large cap versus small cap and defensive versus fully invested.

Part of our defensive approach for the mid sized accounts was to meaningfully reduce our exposure to the industrial sector. In the face of a bear market or recession industrial stocks are often one of the hardest hit sectors and reducing exposure to this sector is something we did in the large accounts also. Defensive action in this sector is a way to get more bang for your defensive buck by taking a lot of beta out of the portfolio.

To put the exposure back on we bought the Industrial Sector SPDR (NYSEARCA:XLI). If my thesis about a range busting rally (followed by a retracement) actually happens, then it is likely that industrial stocks will be one of the leading sectors and so we are slightly overweight the benchmark S&P 500.

In many instances XLI will not be the only industrial holding. Sorry if this is confusing, but larger accounts within the mid sized tier may own the PowerShares Water ETF (NYSEARCA:PHO) and/or the iShares Emerging Market Infrastructure ETF (NASDAQ:EMIF). The specific holdings in any account are dependent on the planning/screening process for new clients.

For small accounts our defensive strategy was to cut small cap exposure in half, as similar to the industrial sector, small cap tends to feel bear markets more than large cap. We got defensive when we were still using Schwab as our custodian and so we used Schwab ETFs where applicable because they were commission free. At Ameritrade there are other commission free ETFs, a lot more than Schwab, and so we bought an iShares ETF that is commission free so clients have a split position for the same asset class.

For small and mid sized accounts I waited a little longer to re-equitize in hopes of minimizing the chance of getting whipsawed, and of course that could still happen and we'll deal with it then if that happens. But with the flirting back and forth between the SPX and its 200 DMA and then slow move above the 200 DMA I felt as though I could move a little slower.