Solving Problems

The picture is of the engineer's compartment from Walker Fire's brush truck (type 6 engine).

The hardware pictured is a reducer, an inch and half double female, 2.5 inch double male and a 2.5 inch double female and you can see there is other items in the bin. These tools allow us to change hose size, make connections to truck outlets and even pair up incompatible thread types (there are two types of thread for some reason). The way I have been describing this to new firefighters has always been to say there is no problem that can't be solved out of this compartment, you just need to know what you're looking for. 

The ETF universe is of course similar. I mentioned taking in a new client for my subadvisor relationship early this week. The client came in with 55% in tech with heavy weightings in many of the names that are front and center for the AI/semiconductor mania that we are currently in.

I am hesitant to use the word bubble, I think mania might be a better word. Semantics aside, there is clearly an excess in this theme. Tech/communications is too big to zero out but I've been saying here for ages that I have been underweight. As of right now, tech plus communications adds up to 50% of the S&P 500. History has not been kind to sectors that get above 30%. Obviously there is no way to know when or even if there will be a consequence but the sign of excess is clear. No exposure is a non starter, repeated for emphasis but underweighting is viable.

For this new client, I sold a lot of the smaller names and shaved down the exposure to the major names he held. My usual tech holding for clients is broad based sector ETF that is heavy in many of the names I was keeping for him albeit in smaller percentages than what we walked in the door with. Loading back up on a sector fund that was top heavy in all the same names made no sense and would have left him very exposed to the same stocks that would be in real trouble if there is ever a consequence to the current AI/semiconductor excess. 

While 50% in tech plus communications is a non-starter for me, 10-12% is too light so into the engineers compartment for the Invesco Equal Weight Tech ETF (RSPT). Instead of 45% in semiconductors it has about 25% and obviously there are no holdings in the low double digits or high single digits. Weaving RSPT in with the holdings we kept/reduced allowed for dialing in some pretty precise percentages to bring him inline with other clients. 

Sort of related with the tech excess, back in May I swapped out market cap weighted ETFs for the few clients who had one for the momentum/quality/value combo we discussed a while back. The momentum ETF is kind of like MCW on steroids and the other two differentiate considerably from MCW and I think the three will combine to give a better result with a less total tech exposure than MCW.

The takeaway here is a point we make regularly which is I am not trying to predict anything, I am trying to avoid, or in this case underweight and obvious build up of risk. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.