The best mutual funds and ETFs that own stocks continued their impressive climb in March. And in doing so took aim at Wall Street's narrow market story.
March wasn't all about the Magnificent Seven. And it wasn't about tech stocks or large-cap growth companies leading the way, either. In a clear sign that talk of a broader market rally isn't just talk, it was small-cap and midcap companies, and value stocks climbing to the top of the performance charts.
The average U.S. stock mutual fund gained 3.48% in March, extending the year-to-date gain to 8.76%, according to Lipper Refinitiv data.
Small Stocks Stand Tall For Best Mutual Funds
When it comes to size, mutual funds that invest in stocks with smaller market values posted bigger returns in March than the biggest U.S. companies. Midcap and small-cap core funds, for example, rose 4.71% and 4.25%, respectively, topping the 3.18% return of large-cap core funds.
And from a style standpoint, value topped growth by a wide margin. Large-cap value funds rose 4.62%, more than doubling the 1.91% gain of large-cap growth. Midcap value funds jumped 5.53% versus a 2.56% gain for midcap growth. And small-cap value funds rallied 5.11%, topping their growth counterparts' 2.67% rise.
A market rally driven by more than just a handful of stocks is gaining steam. And that means investors could see further gains in funds that invest in stocks other than the Magnificent Seven or AI-inspired tech names, says Brian Belski, chief investment strategist at BMO Capital Markets.
The so-called other 493 stocks in the S&P 500 as well as smaller-capitalization stocks should no longer be dismissed as dead money.
"Own a little bit of everything," said Belski. "You don't have to just be in Tesla (which fell 12.9% in March and was down 29.3% in the first quarter). You don't just have to be in the megacap names. Earnings growth (in many parts of the market) is going to surprise everybody and there's going to be other stocks other than the Magnificent Seven to carry the weight."
Are Stocks Priced For Perfection?
But Belski, one of the few Wall Street strategists who predicted a good year for stocks in 2023, says stocks are "priced for perfection." There's too much bullishness now. Wall Street strategists, for example, are boosting their year-end targets for the S&P 500 after an already big run, Belski notes.
So don't be surprised if the market suffers a pullback. That's especially a risk if the Federal Reserve continues to push back on the timing of coming interest rate cuts, Belski says. But he's still a long-term bull. Belski says stock prices will be higher 12 months from now even if the market suffers a near-term correction.
The shift in market performance last month is evident in sector returns. The big winners were precious metals funds, which skyrocketed 18.39%, and natural resources funds, which rose 10.18%. In contrast, science and technology funds, home to the megacap tech stocks and the top-performing sector in February, gained just 1.9%. The only sectors with lower returns than tech were real estate funds, up 1.78%, telecommunications funds, up 1.59%, and health/biotechnology funds, up 1.34%.
Tech Lags
Technology's underperformance was also evident in the returns posted by the broader U.S. stock indexes. The S&P 500 posted a total return of 3.22%, extending its year-to-date gain to 10.56%. The Dow was next with a monthly gain of 2.08%. And the tech-heavy Nasdaq was the laggard with a gain of 1.85%.
The heady gains of U.S. stocks last month were yet another reminder that cash is no longer king. The average money market fund rose 0.4% in March.
In the bond market, investors got a little relief as the yield on the 10-year U.S. Treasury note ticked lower to 4.21% despite the Fed's decision to keep its key borrowing rate unchanged at 5.25% to 5.5% and push off rate cuts farther into the future.
General bond funds rose 1.1% in March, offsetting February's decline of 0.95%. The benchmark Bloomberg U.S. Aggregate bond index, which tracks investment grade bonds, gained 0.92%. General U.S. Treasury funds rose 0.76% and high yield funds, which invest in bonds more prone to default, rallied 1.19%.
Despite the continued volatility in the bond market due to the tug-of-war between the Fed and investors as to the timing of the central bank's first interest rate cut, the bond market presents good value, says Warren Pierson, co-chief investment officer at Baird and co-manager of Baird Aggregate Bond (BAGIX), a 2024 IBD Best Mutual Funds award winner.
Best Mutual Funds Eye Treasuries
No matter if the 10-year Treasury yield is 5% or 4% or somewhere in between, the income and diversification you get holding bonds is excellent. Especially when compared to the 0% to 1% of a few years ago. The raw yield on the fund Pierson runs is currently 5.19%, he says.
"The power of that yield going forward is pretty significant," said Pierson. "You're really earning something."
Best mutual funds and stock ETFs got a boost last month from more stocks moving up in price. It wasn't just funds that own stocks with the hot trend of the day — AI — driving profits.
In fact, the top-performing ETFs were those that invest in midsize companies. Invesco S&P MidCap Momentum rallied 7.9% and Invesco S&P MidCap Quality gained 7.72%, according to Morningstar Direct.
Funds in the cannabis space were also big winners. Amplify Alternative Harvest surged 24.85%, and AdvisorShares Pure U.S. Cannabis jumped 15.94%. The gains followed comments from the White House and Vice President Kamala Harris that suggest that marijuana, which is now classified as a Schedule 1 drug or one with no current acceptable medical use and high potential for abuse, be reclassified to a lower, less negative classification.
Value Strikes Back
Investors' move into ETFs that invest in value stocks was dramatic. Vanguard Value, one of the top-10 largest ETFs, sprinted ahead 5.19% in March. In contrast, Vanguard Growth, another popular ETF, gained just 1.34%.
Within the commodity and oil space, top ETF performers in March included Invesco DB Agriculture, which gained 11.68%, and United States Oil which rose 7.4%, thanks to a more than 6% increase in the price of a barrel of U.S. crude.
In another sign that suggests investors may be moving away from parts of the market that have been working, a pair of aggressive ETFs focused on clean energy and disruption were the two worst ETF stock fund performers. ARK Innovation ETF, gained 12.86% in February and gave back 2.31% in March, and Invesco WilderHill Clean Energy ETF dipped 2.4%.
Where a Top Mutual Fund Manager Sees Stock Opportunities Now
John Brim, co-manager of Cantor Fitzgerald Large Cap Focused A (FICGX) (formerly Cantor Growth Equity A before an early-year name change) says the broadening of the market is driven in part by an earnings rebound in sectors outside tech.
"You're starting to see a broadening of earnings strength in the market," said Brim, chief investment officer for equities at Cantor Fitzgerald Asset Management. Brim's fund is a 2024 IBD Best Mutual Funds award winner, which only includes funds with 10-year records that have topped the S&P 500 in the past one-, three, five- and 10-year periods.
Analysts' projected earnings growth of S&P 500 sectors tracked by LSEG I/B/E/S confirm Brim's profit narrative. While profit growth of technology is seen downshifting a tad in 2024, sectors such as consumer staples, energy, health care, materials, and real estate are expected to post improving profit growth as the year progresses.
Overall, analysts forecast S&P 500 profit growth of 9.9% in 2024, versus 4.1% last year.
Brim acknowledged he was surprised to see the S&P 500 up more than 10% in the first quarter and he suspects that is the case for most investors. And while there's always the possibility the market may be ahead of itself, Brim thinks the broadening of earnings momentum gives the market a "strong undercurrent."
What's Next?
The shift to value and smaller-cap stocks that we saw in March is likely to continue, Brim adds.
Brim, who looks for stocks that he thinks will grow earnings faster than Wall Street expects, sees value in many pockets of the market.
He's bullish on Parker-Hannifin, a $72 billion diversified industrial conglomerate. "The company is really benefiting from infrastructure spending, electrification, and manufacturing reshoring, all of which are driving strong earnings trends within the business," said Brim. Brim says the market expects low earnings growth for Parker Hannifin in the next few years. But he sees profits growing in the midteens.
Brim also sees opportunity in midcap stocks, which tend to be more established and profitable than smaller companies. And which are now benefiting from improving earnings. Midcaps are now attractive from both a valuation and growth standpoint, says Brim.
Midsize Opportunities
One midsize stock he likes is MedPace, a $12 billion company that helps small and midsize biotech companies conduct their clinical trials. Whereas giant pharma firms manage their own trials, smaller biotechs "outsource" the work to companies like MedPace. Business has been brisk. MedPace reports a backlog increase of 20% totaling $2.8 billion. MedPace takes a "consultative approach" to their business, says Brim. In coming years, Brim sees annual earnings growth meaningfully higher than the market's 17% consensus.
Brim is also bullish on insurer and reinsurer Arch Capital. Arch, he says, is benefiting from a strong pricing environment, disciplined underwriting and a higher interest rate environment that boosts returns on customer premiums it invests. Brim expects the company to earn more this year and next year than Wall Street forecasts. He says getting solid mid-single-digit profit growth this year and midteens growth next year at a price-to-earnings ratio of around 11 is a good trade. "We see opportunity to add value," said Brim.
