A Theme-Driven ETF Pivots as Valuations Stretch

SPEAKER_1 (0:00)

Coming up now, time for our ETF watchlist.

Greg Swenson is with us, Portfolio Manager of Leuthold Select Industries ETF. Thank you for being with us. We want to hear a little bit about the LST ETF. Tell us more, please.

Greg Swenson (0:16)

Yeah. So with Select Industries, the goal is really to generate our performance through very targeted industry group and thematic allocations. So think of it like, kind of like sector rotation, except we think it makes sense to really go a lot deeper than that sector level and really evaluate the businesses that roll up to those very broad sectors. So think of like, instead of financials, we're looking at not just banks, but we're evaluating regional banks, diversified banks, investment banks.

Because within those sectors, industry groups and themes can behave very differently from one another. This has always been important to us, always been what we've done. I think it's become even more important now with just the rise of a handful of stocks and the concentration they're taking up of the broad indices and the sectors themselves. Sometimes sector allocations have become more like stock selections now. So we're really trying to evaluate the industries and themes kind of on their own merits.

SPEAKER_1 (1:16)

What's interesting is you're having some flexibility in the industry selection. You're looking at different industries, and one industry in particular, construction and engineering. Let's talk about some of the themes within these sectors.

Yeah.

Greg Swenson (1:29)

So we still like, we've had exposure to that AI CapEx beneficiary trade for a long time. For our AI exposure, we've really kind of tilted towards that part of it, away from the hyperscalers for a long time. A group like Electronic Manufacturing Services, companies like Flex, Jbill, those types of companies that make the chips and switches and servers that go into the data centers, we held that group for four years and it's done tremendously well. We also own communications equipment, some tech hardware, companies like that.

Construction and engineering was one group that we held within that theme until last month, mid-July is when we sold it. What we've seen is just that part of the AI trade had just become really extended.

The high momentum names had just really been running for so long and then there's a huge dispersion between those and the AI. The companies and themes at risk of AI and our framework told us to try to just trim a little bit out of the capex beneficiaries and buy some of those groups that are more at risk from AI.

SPEAKER_1 (2:41)

So for example, one thing that you have that you added to was some energy, right? Is that what you added to as you deactivated some of the construction story?

Greg Swenson (2:51)

Yeah, and that's what we did this most recent month. We added to a group we call a big energy. It's some of the biggest energy companies out there.

And that really kind of came to the top of our thematic options because the technicals have improved. And with higher oil prices in this most recent earning season, we really saw that that higher oil prices translate to better fundamentals for the energy companies. But the valuation is still state appealing. So we're not trying to forecast the conflict in Iran. We're not trying to predict oil prices.

But I think we can be pretty sure that going forward, the price of oil will be higher than it was pre-conflict. And I think the energy companies are doing a good job showing that they can translate that into better earnings.

SPEAKER_1 (3:41)

Yeah, that was going to be my next question. Will you stay in energy? And the answer looks like yes, because you're saying, or at least you surmise, that oil will be higher than it was pre-conflict, even if it ends. Other areas here, you've gotten out of education, electronic manufacturing, but added some of the precious metals. That was an area, system software, human resources. Let's touch on one that you added.

Greg Swenson (4:06)

Yeah, so system software and human resources, I put those in the same group as themes that have been viewed as at-risk from AI.

That's when in mid-July, that momentum trade between those two really got super extended. The AI beneficiaries became pretty expensive, and those groups like system software, human resources became very cheap. We thought just being punished too much. We might not think those are fantastic businesses going forward, but to us, they looked like good investments at that point, just because fundamentals have stayed good. Most of it is about projections on how AI will hurt them, and I think it will a little bit, but I don't think it is as much as the market was predicted at that point.