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Categorically Speaking: Core and More

Some strategies group funds by investment style – separating value funds from growth funds, for example, or small cap funds from large cap funds. Our approach is different. We categorize stock funds and ETFs by risk, separating funds into two broad groups: core and speculative. This allows us to control exposure to riskier funds, and it presents us with a full range of investment opportunities. Rather than limiting ourselves to international funds or domestic, for example, we group international funds together with domestic funds that have similar risk profiles and then we invest in whatever funds are currently strong performers, as measured by our performance-based scoring system.

Core Funds and ETFs  

Core funds and ETFs are generally diversified portfolios invested in shares of established companies. They tend to be large or mid-cap in size. Though mostly domestic, the core group includes international and global funds, which typically invest in larger companies in mature economies, like Europe. Core equity funds may include some fixed income instruments such as bonds, convertibles, preferred stock or cash, but their primary focus is long-term growth through equities.

How We Use Core Funds and ETFs  

We believe the core group should be the foundation of your long-term growth nest egg. That’s why most of the moderate growth portfolios we manage are primarily invested in core funds. In fact, 100% of the equity funds in the FundX Conservative Upgrader Fund (RELAX) are core funds. The FundX Upgrader Fund (FUNDX) and FundX ETF Upgrader Fund (REMIX) target 70% of their respective portfolios in core funds or ETFs. We also maintain a meaningful allocation to core funds in the FundX Aggressive Upgrader Fund (HOTFX), which targets 40% to core holdings.

Speculative Funds and ETFs  

Funds and ETFs we categorize as speculative include those whose risk level can be significantly higher than the broad stock market indexes. These funds may lack diversification by focusing on a few sectors, or even just one industry, or they may be concentrated in a small number of individual holdings. These funds may focus on special investments such as gold, precious metals, REITS or natural resources. Or they may invest in small or micro-cap companies, which can be riskier than larger companies, though they may have greater growth potential. Speculative foreign funds may invest in a particular country or region, including emerging markets. Any or all of these characteristics may lead us to group a fund in our speculative category.

How to Use Speculative Funds and ETFs

Because speculative funds and ETFs seek higher returns consistent with increased risk, they can make up a significant proportion of our more aggressive growth portfolios, such as HOTFX and UNBOX.

For moderate growth portfolios, such as FUNDX or REMIX, we restrict total exposure to speculative funds to about 30% of the overall portfolio. We further attempt to reduce risk by taking smaller individual positions in more speculative funds. By including some exposure to these more aggressive funds and ETFs we gain access to a wider array of investment opportunities and potentially increase returns.

In more conservative growth portfolios such as the FundX Conservative Upgrader Fund (RELAX), we do not invest in funds or ETFs we categorize as speculative. If you feel these aggressive funds are not for you, RELAX may be a reasonable choice, offering some growth potential through core funds, and with a substantial weighting to our Flexible Income strategy as well.

  • Small- and medium-capitalization companies tend to have limited liquidity and greater price volatility than large-capitalization companies.
  • Investments in foreign securities involve greater volatility and political, economic and currency risks and differences in accounting methods.
  • Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities.
  • Non-Diversification Risk –The Underlying Funds may invest in a limited number of issuers and therefore may be considered non-diversified.
  • Short Sales Risk –The Underlying Funds may engage in short sales, which could result in such a fund’s investment performance suffering if it is required to close out a short position earlier than it had intended.
  • ETF Trading Risk – Because the funds invest in ETFs, they are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a discount to its net asset value ("NAV"), an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a Fund’s ability to sell its shares.

Diversification does not assure a profit nor protect against loss in a declining market.

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