This update provides a summary of market conditions, portfolio positioning, and key changes made in the aggressive Strategic Tactical Account (STA) over the first half of 2025. We prioritize diversification and disciplined risk management while keeping a long-term focus on capital appreciation.
2024 Review – ETF Transition
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.
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 and our Vanguard US Multifactor ETF and bought a 2% position in iShares MSCI USA Quality Factor ETF and added 0.5% to our core Vanguard Total Stock Market Index ETF. We also modestly shifted our large-cap value holdings from Schwab US Dividend Equity ETF to Vanguard Value ETF. Our International Allocation of 24.5% remained slightly underweight our Neutral Target of 25%, and split between actively managed developed market Dimensional International Core Equity Mkt ETF (12.5%) and index-based Vanguard FTSE All-World ex-US Index ETF (12%), which includes exposure to Emerging Markets.
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 ian actively managed ETF in each WAM account with stock exposure, including STA. We further shifted our Large-Cap Value emphasis from Schwab US Dividend Equity ETF to Vanguard Value ETF.
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. Despite extreme volatility, Q2 delivered robust returns for large-cap US stocks, led by the S&P 500 and tech-heavy Nasdaq closed the First Half at All-Time Highs. Meanwhile, small- and mid-caps also posted strong recoveries and Q2 gains but lagged YTD, closing the First Half in negative territory.
As markets normalized, we made additional portfolio adjustments in late May. We further trimmed our small-cap position, and 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.
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, added Fidelity Enhanced Mid Cap ETF (+9.5%) and replaced SPDR Portfolio S&P 400 Mid Cap ETF (-9.5%)
- Further shifted our Large-Cap Value emphasis from Schwab US Dividend Equity ETF (-1%) to Vanguard Value ETF (+1%)
- Late May, added actively managed Capital Group Dividend Value ETF (+7%), replacing remaining Schwab US Dividend Equity ETF position (-7%), to pair with index-based Vanguard Value ETF
- Trimmed our Dimensional US Small Cap ETF Small Cap Allocation (-0.5%)
- Locked in our 25% Neutral International Target balancing Dimensional International Core Equity Mkt ETF with Vanguard FTSE All-World ex-US ETF (12.5% each)
The Outlook – H2 2025
While the market’s resilience and speed of recovery have been remarkable, we anticipate continued market turbulence 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.
