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STA - Select Tactical Account

<p class="">4-30-23





2022 was full of challenges for the global financial markets in both stocks and bonds. It included a bear market in stocks and the worst year in the history of the bond market, with the Bloomberg Aggregate Bond Index falling 13%. Though STA doesn't have direct exposure to bonds, changes in interest rates and Fed monetary policy does impact the overall investment environment and presents challenges for the stock market and our aggressive STA Account

Along with ongoing portfolio management, we are in process of converting STA from mutual funds to Exchange Traded Funds (ETFs) along with our other WAM Accounts, as noted and detailed in Important News. This is a result of the Charles Schwab and TD Ameritrade merger which will be completed 9-5-23.  We are excited about ETFs' benefits of lower expenses, no trading costs, and better tax-efficiency, which are all in the Best Interest of our Clients. STA is no stranger to ETFs and their advantages, as we've owned them in the past but many years ago.  The ETF conversion began in October 2022 with a share-class exchange and non-taxable conversion of Vanguard Total Stock Market Admiral shares to ETF shares (fractional shares were sold and a taxable event in taxable accounts). During the conversion, we are replacing some longstanding positions and partnerships (DoubleLine, MFS, Goldman Sachs, Fidelity, and Thrivent) with ETFs that have the same or similar investment objectives, including Dimensional Fund Advisors (DFA), SSGA-SPDR, and Schwab and strengthening existing ones like Vanguard. As of the end of April, we have converted STA to 80% ETFs and the ETF conversion will be completed by 6-30-23

The transition to 100% ETFs in STA has also furthered an evolving modification in portfolio strategy with STA, including a name change to Select Tactical Account to better reflect the objectives. Since inception in 1992, STA has stood for Sector Trading Account. In its early years, sector investment and rotation predominated the STA investment strategy. However, over the many years STA evolved to employ more defined, institutional-style asset allocation among asset classes, market caps, investment style, and alternatives, with less and less emphasis on sectors. While sector and factor ETFs will remain among available investment opportunities for STA, we will continue focus on tactical asset allocation for structured diversification, risk management, and above-average capital appreciation. 

Adding to volatility in the stock market, both in the US and overseas, the Fed has been aggressively raising interest rates to combat high inflation in part by slowing the economy, including two 0.25% hikes in Q1 and nine times overall since last March totaling 4.75% (ending April). We are close to the end of that process, as inflation has been steadily trending down since the 9.1% peak last June, though at 4.9% (April) it has remained stubbornly above the Fed's 2% target ending. 

The Fed's aggressive rate hikes that began last March have raised recession risk. Markets are calibrating how much was already discounted in 2022 and how much remains. The answer lies in what type of recession occurs if we indeed enter one. While a soft-landing/shallow recession remains the baseline later this year or 2024, anticipated reverberations of the mini-banking crisis in March have raised risks of a moderate recession. The risk of a severe recession remains low.

Given the more attractive valuations in stocks created in 2022, we began scaling out of our defensive Alternatives Allocation in February and reallocating back to stocks in STA. We added 2% back to undervalued small-cap stocks initially in a new position with Dimensional US Small Cap ETF (the eventual landing place when we convert Vanguard Strategic Small Cap Equity in May). We added to US-based Vanguard Total Stock Market ETF in April, and the last 1% will go to our International allocation as we move closer to a neutral International position given the attractive long-term valuations overseas. 

[Update]: We expected another 0.25% at the early May Fed meeting, and that is what the Fed delivered with its 10th straight rate hike totaling 5.00%. While a pause is now expected, as recession risks have risen, the market is pricing in one or more interest rate cuts by year-end; however, the Fed is not projecting a rate cut until 2024. 

A direct benefit of our conversion to 100% ETFs is a big reduction in investment expenses. Low investment expenses have always been a priority in our WAM accounts, giving our clients access to Institutional and Advisor mutual fund shares. ETFs will further our low-expense mandate and as a result, we've put a weighted expense cap at 0.25% for our WAM accounts. This means at least a 25% savings in investment expenses for our STA clients! Our projected STA Model Weighted Expense Ratio is 0.09%, which is a 74% savings! The STA Weighted Expense Ratio will fluctuate with allocation changes over time with a max cap of 0.25%.

Volatility remains in the forecast for the market, including interest rates and bonds, as recession risks remain elevated. We will continue to prudently manage those risks with a long-term focus on diversification and seek above-average capital appreciation for our Select Tactical Account - STA

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Investor Note

Mutual Fund and ETF (Exchange Traded Fund) investment strategies, which include investing in specific sectors, foreign securities (both developed and developing markets), high yield securities, or small and medium sized securities may increase the risk and volatility of the funds/sub-accounts. Changes in interest rates may affect the performance of fixed income (bond) funds; if rates increase, bond values decrease and vice versa. Investors should consider the investment objectives, risks, and charges and expenses of the Mutual Fund and/or Variable Annuity carefully before investing.

The Mutual Fund and ETF prospectus (and summary prospectus, if available) contains this and other information. Please read carefully before investing. A Mutual Fund and ETF prospectus can be obtained by calling your Nelson Rep at 800-345-7593 or the Mutual Fund and/or ETF company directly.

Publisher: Nelson Securities, Inc.

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Information and historical market data contained within this newsletter are taken from sources we believe to be reliable but, we can not guarantee its accuracy. Nelson Securities, Inc., or the publisher, will not be held responsible for actions taken based wholly or partially on information contained herein. Recommendations are of a time-sensitive nature and not a substitute for a comprehensive plan for investing. Each investor must consider suitability with regard to risk prior to investing.