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Boosting Our Cash Levels by Trimming ETF

Cutting back on our IWM position should serve to insulate the portfolio from potential market downside.
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After you receive this Alert, we will sell 108 shares of the iShares Russell 2000 ETF (IWM) at or near $156. Following the trade, our remaining 150 IWM shares will represent just over 10% of the overall portfolio. Over the last few years, we’ve kept a position in the iShares Russell 2000 ETF to put some of our excess cash to work for us. It’s not a position that we talk much about even though it is listed on the Stocks Under $10 portfolio page. It is a portfolio tool that we’ve employed since 2015 to help us earn a return that approximates our benchmark. This is no different than a portfolio manager whose benchmark is the S&P 500 utilizing SPDR S&P 500 ETF Trust (SPY) shares to park excess cash and keep pace with the S&P. With the Russell 2000 up 16% year to date, IWM has served us rather well. That said, in recent weeks we’ve added several new holdings to the active portfolio and scaled into existing ones as well. As one might suspect, those moves have taken our cash levels down from near 50% of the portfolio several months ago to around 37% as of last night’s market close and after Wednesday’s addition of Encana Corp. (ECA) to our holdings. On the one hand, we have increased our market exposure to individual stocks, but the overall market has also continued to march higher, pushing the upside to downside teeter totter to a neutral to downside slant, in our view. Clearly, the current earnings season and what it says about corporate performance relative to expectations in addition to how its sets up, or resets, expectations for the June quarter will be a key driver for the overall market in the very near-term.

Last week’s earnings suggested an initial “better-than-expected” possibility; however, as more reports have come in it increasingly resembles a mixed bag. While financial and healthcare-related company earnings have topped expectations, other sectors, like the rails, are turning in mixed results.

CSX Corp. (CSX) hit a fresh high after delivering a solid March quarter, but competitor Genesee & Wyoming (GWR) shared that its February rail traffic fell 1.8% year over year and logistics company J.B. Hunt Transport Services (JBHT) missed expectations as a post weather disruption snapback in demand failed to materialize. What this tells us is there are bound to be both pockets of strength and weakness this earnings season. As such, we are going to boost our cash levels by trimming our IWM exposure, which should also serve to insulate us from any market downside in the coming weeks.

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