IMPORTANT PRIVATE CLIENT UPDATES
February 20, 2025 - On February 26th, the joint venture between SMI Advisory Services and 3Fourteen Research will be introducing a new exchange traded fund, the Real Asset Allocation ETF (ticker RAA). As you may recall, SMI Advisory Services and 3Fourteen Research teamed up last year to create the Full Cycle Trend ETF (FCTE) that now comprises half of Private Client’s Enhanced Stock Upgrading strategy.
The new RAA ETF will follow the same processes we have been using to select Enhanced Dynamic Asset Allocation (EDAA) securities. Over the next several days, we will be replacing most of the individual securities owned as part of your EDAA allocation with the RAA ETF.
The RAA ETF provides significant benefits for Private Client investors.
  1. Tax benefits for taxable accounts. ETFs can shield shareholders from a large portion of the capital gains realized when the ETF sells securities. Of course, ETF owners still must recognize any gains associated with an increase in the share price when they sell it. But the ability to defer taxes while the ETF is held allows for tax-deferred compounding and favorable long-term capital gains tax rates.
  2. Giving opportunities. Along with tax benefits described above, allowing most of the gains to remain embedded in the shares creates an opportunity to gift shares with long-term gains to charity, avoiding taxes entirely.
  3. Position sizing and trading complexity. Because Schwab does not allow investors to buy fractional shares of securities, and because EDAA routinely holds 20 or more securities, it was not always possible to size every security position as precisely as desired across all client accounts. Using the RAA ETF enables Private Client to bypass sizing and complexity constraints because the strategy is fully implemented within the ETF.
  4. Simplicity. Owning one ETF rather than 20+ separate securities will streamline Private Client portfolios and dramatically reduce the number of trade confirmations sent to clients.
SMI Advisory Services anticipates earning roughly 0.26% as its share of the new RAA ETF management fee, so we will waive your SMI Private Client management cost by 0.26% for any assets invested in the RAA ETF.
For more details, please see the February Private Client Strategy Update letter and video, that will be released later today (February 20).
In addition to the use of the new RAA ETF to implement the Enhanced DAA strategy, three other changes are being made to SMI Private Client portfolios, effective immediately.
1. Model Portfolio Streamlining & Strategy Target Weights
Each year, the Private Client portfolio managers review the Standard model allocations and adjust the strategy mix as appropriate. This year, those adjustments may be larger than usual due to the following factors.
  • The range of standard Private Client portfolio models is being streamlined.
  • The implementation of Enhanced DAA during 2024 means the models effectively had more bond exposure than they did previously. To adjust for this, we have reduced the bond strategy allocations within most standard portfolios to maintain the risk/reward profile outlined in your signed Investment Policy Statement.
Any adjustments to your portfolio will be visible in your Private Client dashboard.
On a related note, the Disclosure Language associated with strategy allocation target weights is changing as follows:
“All stated target weights are based on allocation choices input by you and/or your Adviser. These target allocations represent the midpoint of a +/- 5% range for each strategy and may change as economic and market conditions dictate. All weightings ignore the concept of whole shares and instead use the exact percentage chosen when creating the portfolio(s).”
Note that the changes in this, Section I, only apply to Private Client standard models; custom models will not receive these adjustments. If you are using a custom model, we suggest speaking with your Stewardship Advisor to review if any changes are appropriate. While custom models are appropriate in certain situations, we encourage most clients to utilize Private Client standard models so they can immediately receive the benefit of future adjustments to the strategy allocation mix as soon as they occur.
2. Commodities Allocation:
Since 2021, SMI Private Client has treated Commodities as a separate strategy, investing in a Commodity Index ETF when commodity momentum was strong and in a money market fund when momentum was weak. Commodities were listed separately in Investment Policy Statements and in Private Client reporting.
Beginning this month, Commodities will now be included in and reported as part of the Enhanced Stock Upgrading strategy. The same Commodity Index ETF will be used when commodity momentum is strong, but the strategy will now be able to invest in any Enhanced Stock Upgrading fund when commodity momentum is weak – usually a stock fund rather than a money market fund.
3. Just the Basics / Indexing
Previously, allocations to Large Cap, Small Cap, and International JtB/Indexing were listed as separate strategies, segregated on Investment Policy Statements and in Private Client reporting.
Beginning this month, JtB/Indexing will be reported as a single strategy, with allocations to Large Cap, Small Cap, and International determined (and occasionally adjusted) by the Private Client portfolio managers. At this time, this is just a category naming change with no modification to this strategy’s current holdings. However, this change will allow Private Client portfolios to more easily respond to long-term trend changes between these stock groups in the future.
As always, please contact us if you have any questions or concerns.
Blessings,
Mark Biller
Senior Portfolio Manager