This update provides a summary of market conditions, portfolio positioning, and key changes made in the moderate-aggressive Capital Growth Account over the first half of 2025. We prioritize diversification and disciplined risk management that focuses on capital appreciation potential with a modest defensive ballast of fixed income.

2024 Review – ETF Transition & Bond Strategy

2024 marked the first full year of being 100% invested in Exchange Traded Funds (ETFs) for all WAM accounts, completing the transition in June 2023. This shift resulted in significant expense savings for clients, including the elimination of custodial fees. On the bond side, we continued moving toward our Neutral Bond Allocation (10% short-term, 90% intermediate core/core plus) and adjusted positions, like reducing our iShares 0-5 Year TIPS Bond ETF position and adding to Intermediate-Term Core Bond, to restore defensive bond exposure while capturing higher yields. We sold our remaining position in iShares 0-5 Year TIPS Bond ETF and added it to our Capital Group Core Plus Income ETF, bringing our Short-Term exposure to our 10% Neutral Bond Allocation (relative), with an emphasis on quality intermediate Core, and Core-Plus Bonds. The Fed remained on pause until September 2024, when it cut interest rates for the first time since early 2020.

Equity Performance & Positioning

U.S. stocks outperformed international peers in 2024, with the Nasdaq and S&P 500 leading double-digit gains. International developed markets, measured by MSCI EAFE, rose just 1.2%. In July 2024, we reduced small-cap exposure, modestly shifted large-cap value holdings from Schwab US Dividend Equity ETF to Vanguard Value ETF, and increased our core Vanguard Total Stock Market Index ETF position.

Early 2025 Market Conditions

Following the January inauguration, markets rallied to all-time highs on policy announcements, including the DOGE commission, immigration, and tariff policies. In late January, we replaced SPDR Portfolio S&P 400 Mid Cap ETF with Fidelity Enhanced Mid Cap ETF and further shifted our large-cap value emphasis from Schwab US Dividend Equity ETF to Vanguard Value ETF. On the bond side, we increased our allocation to Capital Group Core Plus Income ETF for active management and yield opportunities, trimmed Vanguard Intermediate-Term Bond.

Q2 Volatility & Recovery

Tariff policy changes in early April triggered a sharp market drop, followed by one of the largest single-day rallies in decades on April 9 after a 90-day tariff pause was announced. By April month-end, major indexes had recovered most losses, highlighting the importance of staying invested during volatile periods. We remained patient and disciplined during the turmoil, refraining from making changes we had planned for the Second Quarter. That patience and discipline was well-rewarded. The swing from extreme pessimism to relief was one of the quickest and largest in magnitude in modern history and missing even one day was devastating for returns. The April 9th 90-day reciprocal tariff pause rally was 8%-12%+ and by April month-end represented over 80% of the gains in the major US markets indexes. By the end of May about 50%, and by the end of June still over one-third of the gains.

As markets normalized, we made additional portfolio adjustments in late May. We sold our remaining Large-Cap Value position in Schwab US Dividend Equity ETF and replaced it with Capital Group Dividend Value ETF, an actively managed Large-Cap Value ETF to pair with our passive index-based Vanguard Value ETF. This process included slightly trimming our Vanguard Total Stock Market Index ETF. We addressed tariff and rising inflation risks by slightly reversing course on our Neutral Bond Allocation. In late May, we bought back a 5% relative weight position in iShares 0-5 Year TIPS Bond ETF, which provides short-term Treasury Inflation Protected Securities to address the inflation risks and being short-term, provides a hedge against rising interest rates. We pared our Intermediate Core-Plus Bond positions 2% and this increased our relative Short-Term exposure from Neutral 10% to 15%. 

International Allocation & Currency Impact

A 10.7% drop in the U.S. dollar during the first half of 2025 boosted international equity returns, leading to notable outperformance versus U.S. stocks. Our long-term strategy of gradually increasing international exposure, which began in 2017 and the last in 2023, brought allocations close to or slightly above Neutral targets across account styles by mid-year with market appreciation. We locked in our 25% of Equity Neutral International Target Allocation in late May.

Key Portfolio Adjustments – H1 2025

• Late January 2025, we rebalanced and added Fidelity Enhanced Mid Cap ETF (replaced SPDR Portfolio S&P 400 Mid Cap ETF)
• Trimmed our Small-Cap Allocation and further shifted large-cap value emphasis from Schwab US Dividend Equity ETF to Vanguard Value ETF
• Added to Capital Group Core Plus Income ETF (+1%)
• Reduced Vanguard Intermediate-Term Bond ETF (-1% each)
• Late May, bought Back iShares 0–5 Year TIPS Bond ETF (+1%) for inflation and interest rate hedge, modestly reversing our Neutral Bond allocation
• Trimmed Capital Group Core Plus Income ETF (-1%) 
• Added actively managed Capital Group Dividend Value ETF (+6.5%), replacing remaining Schwab US Dividend Equity ETF position (-6.5%), to pair with index-based Vanguard Value ETF
• Trimmed Vanguard Total Stock Market Index ETF (-1%)
• Locked in Neutral International Target balancing Dimensional International Core Equity Mkt ETF with Vanguard FTSE All-World ex-US ETF (10% each) 

The Outlook – H2 2025

While the market’s resilience and speed of recovery have been remarkable, we anticipate continued market choppiness driven by tariff policy negotiations, inflation expectations, Federal Reserve interest rate policy, market valuations, and currency movements. Uncertainty remains elevated; however, we remain cautiously optimistic and will maintain diversified positioning to balance growth potential with risk management and a long-term focus on capital appreciation. Staying invested and disciplined remains essential to capturing long-term returns.

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