Best Mutual Funds And ETFs Invest In Growth, Avoid Volatility And Inflation

Markets experienced increased volatility in July due to an accumulation of mixed signals from economic and inflationary readings, earnings reports and an uptick in the Covid Delta variant cases. Some of the best mutual funds and ETFs centered around large-cap growth stocks, commodities and real estate.




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“It’s been an interesting month,” said Sal Bruno, chief investment officer of Index IQ. “We’ve seen conflicting data and moves in the market. We have seen inflation come in strong again. Not surprisingly, the Federal Reserve continues to downplay that and call it transitory, although, I think what’s interesting is that the definition of what’s ‘transitory’ is undefined.”

In addition, he said, the Delta variant “took a chunk out of the market (earlier in the month),” and then the market downplayed it by rallying again. Bruno also pointed to an overdone reaction of the markets where there was a pronounced rotation out of the cyclical sectors: “Energy, materials, financials and banks got hit particularly hard when the market was reacting to increasing numbers on the Delta variant.”

Best Mutual Funds And ETFs Gained In July

U.S. diversified mutual funds on average rose 0.72% in July and are up 15.62% YTD, according to Lipper Inc data. The S&P 500 and the Nasdaq advanced 2.38% and 1.19%, respectively.


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Large-cap growth, large-cap core and S&P 500 index funds were among the best mutual funds and ETFs, surging 2.81%, 2.32% and 2.34%, respectively. Their YTD returns are between 16% and 17%.

Sector equity funds underperformed on average. Some of the best mutual funds and ETFs included commodities base metals, real estate, utility and basic materials, surging between 2.5% and 5% in July. Except for utility funds, which are up over 7% YTD, those other funds score YTD returns between 22% and 57%.

Natural resources, consumer services, consumer goods and financial services funds ended the month in the red, trimming their impressive YTD performance in a counter-rotation trade.

That said, “I don’t think we’re going back to a period of the shutdowns that took hold for a good 12 months,” said Bruno. He believes the market recognized this in the last few days of the month as equities rallied.

Strong Stomach Required To Withstand Volatility

Investors would need a stronger stomach to withstand this volatility, he said. But added “you would need an even stronger stomach if you’re trying to play the sector rotation as that looks particularly challenging depending on the news of the day.”

Among the best U.S. diversified stock ETFs in July were Invesco S&P 500 Pure Growth (RPG), iShares Russell Top 200 Growth (IWY), SPDR Portfolio S&P 500 Growth (SPYG) and iShares S&P 500 Growth, surging between 3.78% and 5.15% on the month. Year to date, Invesco’s S&P SmallCap Revenue (RWJ) and SmallCap Value with Momentum (XSVM) were the top performers, at 43.15% and 42.15%, respectively. Cambria Shareholder Yield (SYLD) was third at 39.30% year-to-date.

Internationally, world equity funds fell over 1% on average. China region, Pacific ex-Japan and Emerging markets funds were by far the worst performers due to a stronger dollar and geopolitical jitters in China. China region funds sank over 10% on the month and are now down 4.46% YTD. The country’s performance affected other mixed region funds of which China often makes up a large chunk. European region funds, on the other hand, rose 2.28% in July and 15.06% YTD on higher GDP data.

The overall uncertain market sentiment in July was also reflected in the bond markets. The 10-year U.S. Treasury yield reached below 1.3% in the second half of the month despite higher inflation readings.

Unexpected Decline In Rates

“The decline in rates caught many people by surprise, including myself,” said Jurrien Timmer, director of global macro at Fidelity Investments. “The 10-year U.S. Treasury yield had risen to 1 ¾%, it fell as low as 1.18% (at some point in July) or so, and we’re in the 1.20%’s right now — that’s somewhat unusual. Because what we saw a few months ago was the classic taper tantrum: where the market sniffs out that the Fed is going to reduce asset purchases. It would be logical then to conclude that if there’s less demand for Treasurys from the Fed, and there’s going to be ongoing supply from the Treasury because there are still a number of fiscal programs coming down the pipe, that rates would be rising.”

General U.S. Treasury funds rallied, jumping 2.39% in July. They’re still down over 2.5% in 2021. Inflation-protected bond funds also had a good run, up 2.1% during the month and 4.15% YTD. Municipal bond funds also did well, rising 0.7% as a whole.

Timmer said that buying bonds is part of the same counter-rotation trade from value to large-cap growth stocks. So, while the markets had the reflation theme (rotation to value and cyclical stocks) happening in the past six to nine months with rising inflation expectations, “the markets are already looking past that,” he explained.

As the market is forward-looking, he said, it’s trying to assess a slowdown in the expansion (not a reversal): “I view all of this as a counter-rotation and my sense is that it’s going to be temporary, that at some point fears about the Delta variant, presumably, will dissipate, and the economy will be back on track.”

Best Mutual Funds And ETFs Are Built To Withstand Inflation

Going forward, “The transitory inflation debate is the key metric to monitor,” said Michael Sewell, vice president and portfolio manager in the fixed income division at T. Rowe Price. He is also lead manager for the $1.6 billion T. Rowe Price U.S. Limited Duration TIPS Index (TLDTX).

“What we’re seeing is headline inflation is running at 5% year over year, but nominal wage inflation is at 3%,” he explained. “That gap that persists is effectively an erosion of consumer purchasing power. So, it’s important to monitor that gap and that gap needs to resolve itself.”

He believes the most likely outcome is that price inflation comes down and “transitory factors prove to be transitory. That would be positive for growth and markets. … I think what the market is pricing in is the impact that inflation is having on growth. So, if that inflation dissipates, then the market would be more comfortable with the growth trajectory.”

Because of this environment, he advises, while still maintaining the risk level in the portfolio, to favor secular over cyclical exposures. In addition, tilting the portfolio toward upper quality vs. a lower quality bias is important. So, he suggests maintaining some duration as a risk hedge in a bond portfolio, while using short-dated TIPS (Treasury Inflation-Protected Securities) as a cash substitute.

Equities Are “Proven Portfolio Anchor”

From an asset-class point of view, Fidelity’s Timmer likes equities as they are a “proven portfolio anchor.” Despite drawdowns and volatility, “for investors who have a long-term horizon, there really is no other asset class that even comes close to the compounding power of stocks,” he said.

“I’m looking here at a cycle transition from early to mid,” said Timmer. “And mid is the part of the cycle that is positive — you’re in an expansion — and it’s actually very sustainable.” He noted that the early part of the cycle is sustainable but is driven by higher price-to-earnings ratios, which can only go so high.

Within equities, he still likes emerging and developed markets. Within the U.S.: “I like the growth side because they do generate that free cash flow. It’s a proven story, it’s been going on for 10 years, and those stocks are really not that expensive. But on the other hand, if inflation proves to be more sticky and growth does reaccelerate in the coming quarters, then there’s a case to be made for value as well. I guess my answer is I would like to have a broadly diversified basket of stocks. To me, there’s not one particular sector that absolutely screams out to be saying ‘I want to be in that sector.'”

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Roy Walsh

Roy Walsh

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