Investors hoping for relief in April following a turbulent first quarter didn't get it. Some of the best mutual funds and ETFs suffered their biggest declines since the financial crisis in 2008. A few bright spots remained, though.
April's volatility fed off investors' worries. Escalating geopolitical unrest, China lockdowns, persistent inflation and surging yields gave investors plenty of reason to sell their stocks.
However, experts pointed out the main driver behind volatility was a more hawkish Federal Reserve.
"It was a painful month for most investors as the markets really had to adjust," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. "The main driver was the market's adjustment to the more hawkish Federal Reserve stance. And so, the various Federal Reserve speakers over the course of the month, but most notably Fed Chair Powell, really had the market on its heels."
Interest Rates Spike, Best Mutual Funds Adapt
The 10-year U.S. Treasury yield spiked over 50 basis points to end the month at 2.89%. The Nasdaq composite sank 13.24% on mixed earnings news and Amazon.com's disappointing results. It was the tech-heavy index's worst month since 2008. The S&P 500 and the Dow each shed 8.72% and 4.91% — their worst performance since March 2020.
"The market is now expecting we're going to get close to 3% in Fed funds, or somewhere between six or seven interest rate hikes between now and early 2023," he added. "Obviously rising interest rates have the biggest impact on the highest P-E stocks, which is why Nasdaq took it on the chin more than indices like the Dow and the S&P."
U.S. Stocks Continue Slide
U.S. diversified equity mutual funds shed an average of 8.03% in April, according to preliminary Refinitiv Lipper data. They're down 13.34% this year. Among the worst performers were leveraged stock funds. But mid, multi and large-cap growth funds suffered, too. They're all off between 12% and 17% in the month. Dedicated short bias funds were the only best mutual funds, surging 15.37% in April and 16.63% this year.
Among U.S. diversified stock ETFs, some of the worst funds declined from 15% to 29% during the month. Losses ranged from 26% to 50% for the year. No ETF in this group posted a positive return during the month. Only 12 are still up on the year. Among the best ETFs this year are WisdomTree US High Dividend, up 4.24%, Invesco S&P 500 High Dividend Low Volatility, up 4% and First Trust Morningstar Dividend Leaders, up 3.63%.
Sector funds also fell. Science and technology, health and biotech, financial services, consumer services and telecommunication funds are among the worst performers in April. On the year, only natural resources, energy MLP and utility funds were the best mutual funds.
Year to date, the best sector ETFs are Invesco Dynamic Energy Exploration & Production, VanEck Oil Services and SPDR S&P Oil & Gas Equipment & Services — all up 42% or more. The latter two, however, were down in April.
Commodities Mostly Thrive
In the commodities space, natural gas funds outperformed. The price of natural gas gained amid the conflict in Ukraine. United States Natural Gas and United States 12 Month Natural Gas surged 25% or more in April. They're up 100% and 92%, respectively, this year. On the other end of the spectrum, silver, copper, platinum and gold underperformed.
"Gold was down slightly for the month of April, about 3.7%, reversing the roughly 2% gain the metal enjoyed in the first two weeks of the month," said Jason Teed, co-portfolio manager of the Gold Bullion Strategy Fund and director of research at Flexible Plan Investments.
"Initially, gold rose along with the U.S. dollar as concerns about global equity markets and inflation resulted in upward pressure on the price of the metal," he said.
Teed said the precious metal will continue to face headwinds due to the Fed's hawkish policy. "Inflation continues to run high, and it's likely that through the remainder of the year the asset will increase in price modestly as rising interest rates and inflation continue to provide opposing forces in price movements."
Inflation Is A Wild Card For Best Mutual Funds
Brian Demain, portfolio manager at Janus Henderson Investors and co-manager of $20 billion Janus Henderson Enterprise, said "we're now in for a decade of not 7% or 8% inflation, but real sustained inflation and the need to use rates to combat that." He added: "And I think the market is still processing a paradigm shift — it doesn't happen overnight."
He points out many defensive stocks held up well. But higher rates will ultimately hurt them, too. Cyclical stocks are less impacted by higher rates than growth stocks. And yet, "the higher interest rates will impact the real economy in terms of mortgage origination and new investment," he said.
Over time, higher rates will hurt cyclicals' earnings, he says. "So, anywhere you look across the market, it's hard to find areas that are not negatively impacted by the dynamics on hand now," he said.
Where To Invest Now
So, where can investors put their money today?
American Century Investments CIO Victor Zhang believes a barbell approach makes sense. "We have a long-term secular growth strategy as well as the downside-protection quality income value approach," he said.
More specifically, "In the near term, in this period of heightened uncertainty, it will be good to invest in strategies that have downside-protection characteristics," he said.
He's finding opportunities with companies that produce steady earnings and cash flows. It's also a plus if they don't have much debt. That means less interest rate exposure. And a good dividend is a solid kicker, too. "All of which helps the investor to be more protected," he said.
He also likes some longer-term investments in early-stage growth companies. But he picks ones that benefit from lasting secular trends. Just expect volatility. Younger companies "may be slammed in the near term in terms of market action, (but) over the long run, in five or 10 years, many of these companies are poised for rapid growth," he said.
American Century Short Duration Inflation Protection Fund is designed to provide inflation protection while also shielding from interest rate risk. The $2.7 billion fund invests in short-term inflation-indexed bonds, "so the duration is shorter than the typical TIPS," he added. The fund is flat in April and this year.
Finding Opportunities
Zhang also believes some emerging markets may provide opportunities. They're expected to have better long-term growth than the U.S. as their consumer base continues to grow.
On the fixed income side, general domestic taxable bond funds lost 2.8% in April and are down 6.7% this year. World income funds posted even worse returns. Inflation-protection ETFs were among the best ETFs, though, with Simplify Interest Rate Hedge up over 17% in April and 56% so far this year.
"In fixed income, as a result of our view that growth is likely to accelerate, and we still see strong inflation momentum, we're not ready yet to call a peak in inflation," said Alessio de Longis, multi-sector senior portfolio manager at Invesco.
"Because of these dynamics, we're underweight duration, so we are underweight government bonds. And in credit markets, given how tight credit spreads are, we prefer to hold short-dated credit exposure, such as short-dated high yield and bank loans, at the expense of emerging markets dollar debt or investment-grade credit because those markets tend to have longer duration," he said.
Most financial experts agree on one thing: stay the course and stay invested. They do not see a recession this year.
"It can be very very costly to position for a recession today, to de-risk today," said de Longis. "By costly I mean missing the upside, missing the continuation of the market."
