In April, the market sent a reminder to investors in the best mutual funds and ETFs: Asset prices don't always go up. After a rip-roaring start to 2024, both stocks and bonds fell.
The average U.S. diversified stock mutual fund lost 4.8% in April, erasing March's 3.48% advance, and trimming the year-to-date gain to 3.45%, according to Lipper Refinitiv data. Core bond funds, which track the benchmark Bloomberg U.S. Aggregate Bond index and hold a broad mix of investment grade bonds, declined 2.43%. And bond investors invested in general U.S. Treasury funds also took it on the chin, as these funds lost 3.7% due to falling prices and rising yields.
Wall Street blamed the losses on stubborn inflation, which remained stuck at 3.5%. And a half-point spike in the 10-year Treasury yield to 4.68% didn't help. Money managers say the Federal Reserve's reluctance to cut rates and instead keep interest rates at current levels for longer than anticipated amounts to a buzzkill.
Best Mutual Funds Take A Hit
The S&P 500's 4.08% drop in April was "payback" for the first-quarter rally that saw the market benchmark rise more than 10%, says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
Still, despite the Dow's 5% fall and the Nasdaq's 4.38% dip in April, Wall Street is taking the declines in stride. There's little talk of a big break ahead with the economy still in expansion mode and consumers still out and spending.
"I'm sticking with my year-end price target of 5500 for the S&P 500," said John Stoltzfus, chief investment strategist at Oppenheimer Asset Management. His forecast, which is bolstered by a resilient economy and U.S. consumer, implies further upside of 7% from current levels.
He still likes the information technology (especially companies whose technology is embedded in people's everyday lives) and communications services sectors. And he says a still-healthy U.S. shopper bodes well for companies that sell discretionary goods. Higher rates should also provide a tailwind for big banks by boosting profits, Stoltzfus adds.
Best Mutual Funds Take A Dip
Stoltzfus says the market dip is a "fairly normal repricing" in reaction to investors coming to grips with the fact that the six or seven Fed rate cuts they expected at the start of 2024 aren't happening. Wall Street is now pricing in just 37% odds of two quarter-point cuts by year-end, according to CME Group's FedWatch Tool, as the Fed works to get inflation back down to its 2% target. The Fed's key rate is currently set in a range of 5.25% to 5.50%.
The weaker-than-expected 1.6% growth on the initial read on first-quarter GDP coupled with April jobs growth coming in below forecasts eased recent fears that an overheating economy will force the Fed to raise rates further. Still, Wall Street pros say investors should prepare for more market volatility. Last month, the S&P 500's average daily high to low range was 1.13%, up from 0.73% in March, S&P Dow Jones Indices data shows.
Nowhere To Hide
Green arrows pointing up were hard to come by in April. Virtually every type of mutual fund lost ground, Lipper Refinitiv fund data shows. Growth funds took the brunt of the selling, and smaller-cap stocks fared worse than big-cap names. Small-cap growth funds cratered 6.7%, midcap growth funds tumbled 6.42%, and large-cap growth offerings shed 4.72%. Their value counterparts held up a tad better. Most sectors also finished in the red, with real estate topping the loser's list with a 7.05% loss, followed by health care/biotech, down 6.36%, and science and technology funds, off 5.87%.
There was money made, though, in funds that bet against the market. Dedicated short bias funds, which post gains when stocks fall, jumped 6.88% in April. On the taxable fixed-income side, loan participation funds, or portfolios that invest in corporate loans that have floating or variable rates, eked out a gain of 0.44%, extending their year-to-date gain to 2.74%.
Cash was also a good place to be. Money market funds gained 0.39%, boosting their 2024 gain to 4.75%. And when it comes to sectors, defensive plays like utilities, which gained 0.69%, held up best. Commodities base metals funds posted the biggest return at 11.07%, driven by continued demand for metals such as copper and silver.
Best Mutual Funds Burned Abroad
Mutual fund Investors hoping for the benefits of diversification outside the U.S. were also disappointed. World stock funds fell 2.44%. The lone winners were China funds, which continued their rebound with a 4.13% gain, and India funds, up 2.18%.
Cannabis ETFs, which soared after reports surfaced that the U.S. plans to reclassify marijuana to a less dangerous drug under federal law, was one bright spot, data from Morningstar Direct show.
On the fixed-income side, investors made money mainly in funds that profit when rates go up, such as portfolios that hedge against rising rates. Funds that invest in floating rate bonds, such as bank loans, whose yield payouts aren't hurt when bond prices tumble, also benefited.
Fixed Income Options
Investing in adjustable-rate senior loans, including bank loans, is a good way to play the bond market now, says Scott Caraher, manager of Nuveen Floating Rate Income (NFRIX). The fund, a 2024 IBD Best Mutual Funds Award winner, seeks a high level of current income by investing in below-investment-grade floating-rate loans. These loans allow you to generate income that moves higher with interest rates.
The main reason for his bullishness is that these loans are not subject to so-called duration risk. That means the holdings are not subject to interest rate risk, or losing value when rates rise. "The power of the loan market is having high current income with zero duration," said Caraher. Currently, these loans yield close to 9% (a 3.5% spread on top of the current SOFR (Secured Overnight Financing Rate) of around 5.3%. "Owning a portfolio of loans from well-known companies that are paying you more than 8% of current income we believe is incredibly attractive," said Caraher.
Spreading Your Risks
Talk of the other 493 stocks taking the baton from the so-called Magnificent Seven didn't play out as planned in April. A review of ETF performance proves otherwise.
Many of the top 20 diversified stock ETFs (ranked by performance through the end of April) that fell the most last month were midcap ETFs, according to Morningstar Direct. The biggest ETF loser of that group, for example, was SPDR S&P 400 Mid Cap Growth, which fell 6.05%. And T. Rowe Price Blue Chip Growth, which held 75 stocks at the end of March, declined 3.82%.
ETFs that invest in small-company shares got hit hard in April, too. iShares Russell 2000 Growth ETF dipped 7.56%. Even established small- and mid-size companies with moats around them couldn't get off the mat. VanEck Morningstar SMID Moat ETF shed 6.92%.
In another sign of a broad sell-off, Vanguard Total Stock Market dropped 4.34%.
Following The Best Mutual Funds
Arthur Yeager, co-manager of Putnam Core Equity, a 2024 IBD Best Mutual Fund Awards winner, says sticky inflation and rising rates "probably have taken a little of the froth out of the market."
For the stock market to start climbing again, inflation numbers must start to come down to avoid the Fed having to raise rates again to finally get inflation back to 2%. Investors must also confront a market that Yeager says is not cheap as well as manage fears including geopolitical risks in the Middle East and a contentious election year at home, he says.
Currently, Yeager and co-manager Jerry Sullivan "don't see any fat pitches" to hit in today's expensive market and advise investors to be patient and wait for a better entry point.
Sullivan says defensive plays like regulated utilities may offer value. "They haven't played for awhile and maybe that's a place to go," said Sullivan. The fund is also involved in beaten-down regional banking stocks and was rewarded in late April when one of their holdings, Heartland Financial, got acquired by bigger rival UMB Financial, sending the shares up sharply.
Tempering Magnificent Seven
The fund has trimmed back its Magnificent Seven holdings and deployed the proceeds to more value-oriented stocks. But that doesn't mean they're bearish on the megacap stocks. "We still want to be there," said Yeager. "They're just incredible companies, with massive cash flows, massive moats and massive advantages."
No doubt it was a risk-off month. ARK Innovation ETF, which invests in disruptive tech companies, lost 13.22%. Invesco WilderHill Clean Energy ETF dropped 1.58%. And Renaissance IPO ETF, which invests in companies that have recently gone public, dropped 10.48%.
Finding Winning Best Mutual Funds
For the second month in a row, the tech sector was outpaced by precious metals — and pot stocks. The tech-heavy Invesco QQQ Trust ETF gave back 4.37% to trim its year-to-date gain to 3.82%. Amplify Alternative Harvest ETF skyrocketed 15.55%. Similarly, AdvisorShares Pure U.S. Cannabis ETF rallied 12.49% to stretch its 2024 gain to 60.63%. Metals ETFs also pushed the pedal to the metal, with Global X Silver Miners ETF soaring 11.36%, and Global X Copper Miners ETF gaining 7.87%.
And while iShares MSCI Turkey ETF was the No. 1 performing foreign ETF, seven of the top-10 foreign ETFs were China related, including a 6.17% gain for KraneShares CSI China Internet ETF.
The big bond ETF winner was Simplify Interest Rate Hedge ETF, which gained 21.34% in April betting against a fall in yields. iShares Floating Rate Bond ETF rose 0.58%.
