Weekly 3WHAT YOU NEED TO KNOW ABOUT THE MARKETSSeptember 21, 2020

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Week in ReviewRusty Vanneman, CFA, CMT – Chief Investment Officer: rusty@orion.com; 402-896-7641

Marc Pfeffer marc.pfeffer@clsinvest.com; 402-896-7225

Case Eichenberger, CIMA case.eichenberger@clsinvest.com; 402-896-7004 CIO Weekly Viewpoint1

SPAC Attack2

All Markets Are Not Created Equal3

The Weighing Machine podcast is available on iTunes.

On Orion Portfolio Solutions’ The Weighing Machine podcast, Rusty Vanneman and Robyn Murray cut through the market clamor and focus on time-tested, proven principles that help financial advisors and investors reach their long-term financial goals.

Market Update Video

Market PerformanceFIXED INCOME 10-YEAR 5-YEAR 3-YEAR 1-YEAR YTD QTD THIS

WEEK

Cash Equivalent1 0.58 1.12 1.59 0.97 0.46 0.03 0.00

U.S. Investment Grade Bonds2 3.73 4.23 5.24 7.85 6.93 0.75 -0.09

EQUITIES 10-YEAR 5-YEAR 3-YEAR 1-YEAR YTD QTD THIS WEEK

Global Equity Market3 8.94 9.64 7.26 9.56 1.52 8.54 0.33

Total U.S. Market4 13.67 13.03 11.79 12.60 4.46 7.81 -0.16

Domestic Large-Cap Equity5 14.27 14.47 13.58 16.60 7.45 8.19 -0.67

Domestic Small-Cap Equity6 10.17 6.40 2.55 -3.94 -9.55 5.38 1.48

International Equity7 4.89 6.17 2.36 5.32 -2.59 9.38 1.09

Developed International Equity8 5.23 5.39 2.08 3.32 -3.91 8.32 0.86

Emerging Market Equity9 3.63 8.75 3.05 10.96 0.96 12.17 1.69

DIVERSIFIERS 10-YEAR 5-YEAR 3-YEAR 1-YEAR YTD QTD THIS WEEK

Diversified Alternatives10 1.80 0.19 -1.11 -4.84 -7.18 1.15 0.45

Commodity11 -5.63 -2.50 -3.46 -7.45 -9.46 12.33 1.97

Global Real Estate12 5.87 4.33 0.38 -9.26 -13.07 4.94 0.82

Source: Morningstar1Morningstar Cash Index 2Bloomberg Barclay’s Capital U.S. Aggregate Bond Index 3Morningstar Global Market Large-Mid Index 4Morningstar U.S. Market Index 5Morningstar U.S. Large Cap Index 6Morningstar U.S. Small Cap Index 7Morningstar Gbl ex U.S. Large-Mid Index 8Morningstar DM ex U.S. Large-Mid Index 9Morningstar EM Large-Mid Index 10Morningstar Diversified Alternatives Index 11Bloomberg Commodity Index 12Morningstar Global Real Estate.

as of 9/18/2020

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CIO Weekly Viewpoint• Last week U.S. stocks closed lower for a third straight week and are now at a six-

week low. Weakness prevailed again in tech stocks while small caps had a strong performance. Expect more volatility as we move through the election season.

• The Federal Reserve left rates unchanged and stated rates will remain highly accommodative until the economy is far along in its recovery.

• For the week the S&P 500 declined 0.6%, the Dow Jones Industrial Average was flat, and the Russell 2000 rose over 2.5%. Growth significantly underperformed value for the third straight week.

• European stocks were higher again and Emerging Market stocks rose by 1.5%, outperforming U.S. stocks.

• Commodities rose nearly 2% and are at the top of the leaderboard for performance so far this quarter. The Bloomberg commodity index is now up over 12% QTD.

• Bond yields remained close to home yet again, barely moving on the FED meeting.

• Goldman Sachs’ latest Pension Rebalance estimates as of the close 9/15, indicate that approximately $23 billion of equities may SELL for quarter-end. This prediction ranks in the 90th percentile in terms of estimated size of rebalancing flows over the past 20 years... (i.e. this is one of the larger estimates on record).

• Important economic data being released this week include existing home sales on Tuesday, the September preliminary Purchasing Managers' Index on Wednesday, and durable goods orders on Friday.

Source: Bloomberg, 9/18/2020

1MARC PFEFFERCLS Chief Investment Officer

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SPAC AttackA Special Purpose Acquisition Company, or SPAC, is what is commonly known as a “blank check company.” Essentially, a SPAC is a publicly traded instrument established by a group of investors who raise money for the purpose of acquiring a private company, therefore bringing it public. There are advantages to companies wanting to go public in this manner. It is typically faster and more cost advantageous, and there doesn’t seem to be a big difference in how much companies are valued. However, buying a SPAC before it has found an acquisition target is considered complete speculation — funding that blank check. Well, apparently complete speculation is all the rage in 2020!

Currently, there are approximately 175 SPACs trading, 135 of which are still seeking an acquisition target. A SPAC has a two-year window to find a target before being liquidated and the money returned to investors. This year (through Sept. 17), more than 100 SPACs have been issued, with the average size nearing $400 million, breaking two records. Companies such as Virgin Galactic (SPCE), DraftKings (DKNG), and Nikola (NKLA) have all gone public via SPAC1.

It seems like “everybody” has a SPAC: Paul Ryan (former Speaker of the House), Bill Ackman (Pershing Square), Gary Cohn (former White House economics advisor), Reid Hoffman (LinkedIn), Jon Ledecky (NHL owner, Uncle of Katie Ledecky), amongst others. There may not be a lot of risk for these owners. If they don’t find an acquisition target, the money is returned after being invested in an interest-bearing account for the two-year period. Bill Ackman even asked the unicorn-of-unicorns, Airbnb, to merge with his SPAC in order to go public. He got shut down1.

What about for us as investors? SPACs offer the potential to invest in a company pre-IPO, something generally out of reach for many of us. But remember — you have no idea what the company the SPAC merges with will be until it’s announced (and the price will have already reflected it). It appears that most of the time, the SPAC muddles along, maybe jumps and then falls on rumors. Eventually, it could move higher if the acquisition is adequate. But many end up failing and closing.

SPACs Number Average Return* Median Return*Seeking Target 82 7.0% 3.8%

Announced Acquisition 33 40.4% 11.9%

*Cumulative return since inception through Sept. 17, 2020.Sources: SPAC Insider, Bloomberg

Above is a look at the currently traded and active SPACs and their returns since inception. The returns are decent, especially for those announcing acquisitions. But this is largely due to the speculative fervor that has taken over parts of the market. What you don’t see here are all the worthless SPACs that still trade like zombies. There are more than 100 SPACs with negative returns this year, and more than 50 that have lost over 50% of their value!

There is actually an ETF in registration that will invest in SPACs and other “next gen IPOs.” While we believe that a diversified format is a better way to invest in something like this, it is still diversified speculation. We recommend that clients who want to scratch the SPAC and speculation itch should — dare I say it — consider doing so, but in small amounts bucketed in a separate account. Wall Street will always find new and clever ways to speculate. We have to help clients resist the temptation.

2GRANT ENGELBARTCFA, CAIA, CLS Director of Research and Senior Portfolio Manager

1 SPAC Insider 9/18/20202 Bloomberg 9/18/2020

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All Markets Are Not Created EqualThe S&P 500 is probably the most widely tracked index for U.S. investors. It represents 500 of the largest U.S. companies and is a generally accepted gauge of the overall market day to day, for the media and individuals. Other countries have similar market-cap-weighted indices of their largest companies. Some ETFs offer exposure to these indices, facilitating broad exposure to other countries’ stock market. Regional ETFs may also provide exposure to a group of countries through similar indexes of the region’s largest companies. One may expect indexes in the rest of the developed world to be similar to the S&P 500, but this is not the case. The chart below shows sector exposure for the S&P 500 (SPY) and MSCI EAFE (IEFA), which represents developed international markets.

SPY vs IEFA Sector Exposure

Source: Morningstar Direct as of 9/18/2020

It is clear there are some major differences. Technology makes up 23% of SPY and less than 10% of IEFA! Other sectors have wide discrepancies, too. It has been noted frequently that international markets are cheaper than the U.S., but the makeup of the index certainly plays a role. The U.S. market has higher exposure to technology, communication services, and consumer cyclical, which are typically higher valuation areas. This taken into consideration with recent performance might lead investors to believe the argument for attractive international markets is invalid. Afterall, the performance chart below shows SPY has outperformed IEFA by nearly 10% annually since 2015.

SPY vs IEFA Returns 9/1/2015 - 8/31/2020

Source: Morningstar Direct as of 9/18/2020

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1 Morningstar Direct 9/11/2020

MICHAEL HADDENCFA, CLS Portfolio Manager

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However, the following two charts compare valuations and growth rates. As expected, developed international markets trade at substantial discounts to SPY, but some explanation of recent underperformance in developed international markets, and hope for the future, is illustrated in the second chart. First, it compares historical growth rates between the two over the past five years, showing the U.S. has seen a huge advantage in earnings growth, potentially leading to the outperformance. Second, it compares expected growth. This shows the forward expected growth rate is actually higher for developed international companies than it is for the S&P 500.

SPY vs IEFA Valuation Ratio

Source: Morningstar Direct as of 9/18/2020

SPY vs IEFA Growth Rates %

Source: Morningstar Direct as of 9/18/2020

The combination of similar growth at cheaper valuations and other factors, including a weaker dollar enhancing foreign returns, point to a bright outlook for international markets. The comparison of underlying indices also serves as an important reminder to investors to know what you own and understand the constituents of any index and/or ETF before investing.

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1 Morningstar Direct 9/18/2020

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The Morningstar Global Market Large-Mid Index is an index that measures the performance of the global market’s equity markets targeting the top 90% of stocks by market capitalization. The Morningstar U.S. Market Index is an index that measures the performance of U.S. securities and targets 97% market capitalization coverage of the investable universe. It is a diversified broad market index. The Morningstar U.S. Large Cap Index is an index that measures the performance of U.S. large-cap stocks. These stocks represent the largest 70% capitalization of the investable universe. The Morningstar U.S. Small Cap Index is an index that measures the performance of U.S. small-cap stocks. These stocks fall between the 90th and 97th percentile in market capitalization of the investable universe. In aggregate, the Small Cap Index represents 7% of the investable universe. Morningstar Global ex U.S. Large-Mid Index is an index that measures the performance of Global Markets (ex-U.S.) equity markets targeting the top 90% of stocks by market capitalization. The Morningstar DM ex U.S. Large-Mid Index is an index that measures the performance of developed markets ex-U.S. equity markets targeting the top 90% of stocks by market capitalization. The Morningstar EM Large-Mid Index is an index that measures the performance of emerging markets targeting the top 90% of stocks by market capitalization. The Barclay’s Capital U.S. Aggregate Bond® Index measures the performance of the total United States investment-grade bond market. The Morningstar Cash Index is an index that measures the performance of a Treasury Bill with six to eight weeks until maturity in the U.S. market. The Morningstar Diversified Alternatives Index allocates among a comprehensive set of alternative underlying ETFs that employ alternative and non-traditional strategies such as long/short, market neutral, managed futures, hedge fund replication, private equity, infrastructure or inflation-related investments. The Bloomberg Commodity Index is made up of exchange-traded futures on physical commodities and represents commodities that are weighted to account for economic significant and market liquidity. This index provides investors with a means of understanding the performance of commodity futures markets and serves as a benchmark for investment performance of commodities as an asset class. The S&P 500 Index is an unmanaged index of 500 large-capitalization companies. This index is widely used by professional investors as a performance benchmark for large-cap stocks. 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