Top mutual funds and ETFs end 2021 on a high note, led by mid-cap value



Despite increased volatility, stocks closed 2021 and December with strong returns as investors braced for a year of higher inflation and rising interest rates. Some of the best mutual funds and ETFs included mid-cap funds, value funds, real estate funds, and other cyclical equity funds.


As many experts predicted, interest rates ended the year higher than they started out. The 10-year US Treasury yield rose 9 basis points in December and 59 basis points for the year, closing 2021 at 1.52%.

“We think Covid-19 is still the investor story,” said Greg Bassuk, CEO of AXS Investments, an alternative investment management firm. “When we look back this calendar year, when in general historically we have looked at corporate earnings and data, we have seen the markets have their biggest moves when news has come out, positive or negative, regarding Covid. And we’re “reviewing this in December with the most recent variant.”

Best mutual funds and ETFs win in December

U.S. diversified equity funds grew 3.69% on average in December, gaining 6.35% and 21.34% for the fourth quarter and 2021, respectively, according to data from Lipper Refinitiv. Among the major stock indexes, the S&P 500 was the best performer of the year, up 28.71%, followed by the Nasdaq with 22.18% and the Dow with 18.73%. For December, however, the order was different, with the Dow Jones jumping 5.38%, the S&P by 4.48% and the tech-rich Nasdaq just 0.74%, with cyclical stocks taking the upper hand.

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“December was a very strong month for most factors,” said Christopher Huemmer, senior vice president and senior investment strategist for FlexShares ETFs, a subdivision of Northern Trust Asset Management. “Factors such as quality, value, low volatility and dividend yield have all been very positive, as has momentum, another of the top six factors.”

In the United States, midcap value and multicap value funds were among the best mutual funds in December, up more than 6%. They generated returns of over 7% in the fourth quarter and are up 29.82% and 26.22% on the year, respectively. Large-cap value and equity income funds also performed well.

Within sectors, real estate, commodities, energy, utilities and basic materials funds were among the best performers in December. They were up between 17% and 77% in 2021.

Global and Indian funds rack up the gains

Internationally, a similar picture has unfolded, with global large-cap value and global equity income funds posting returns of over 6% last month and in the fourth quarter. They jumped over 17% last year. The big winners of the year, however, were funds from the India region, up 25.85%.

On the bond front, general domestic taxable bond funds posted a positive return on average in December and the fourth quarter, despite rising rates. They are up 2.25% over the year. Some of the best bond funds in 2021 were inflation-protected bond funds, high yield funds, and loan equity funds. Short-term bond funds were liquidated in December, causing negative returns.

Some of the best ETFs have followed a path comparable to that of their mutual fund peers. Among the American diversified equity ETFs, Invesco S&P 500 Low Volatility (SPLV) and First Trust Morningstar Dividend Leaders (FDL) were the top two funds in December, up 8.84% and 9.71% respectively. They both reported more than 24% in 2021.

For the year, Invesco S&P SmallCap Value with Momentum, Pacer Lunt Large Cap Alternator (ALTL) and Pacer US Cash Cows 100 (COWZ) were the best performing US diversified equity funds, up 56.39% and 45.3% each.

Sector, value and dividend ETFs end the year with gains

Major sector ETFs in December included Invesco KBW Premium Yield Equity REIT (KBWY), Consumption stables Select the SPDR sector (XLP), Pacer Benchmark Industrial RE Sector (INDS) and Real Estate Select Sector SPDR (XLRE) with yields of over 10%.

Fidelity’s Director of Quantitative Market Strategy Denise Chisholm highlighted three themes that drive markets in this cycle: high fear, inflation and headwinds in technology.

She said that since valuation spreads have always been very high, indicating high investor fears, it means the market has already factored in many of these headwinds. As a result, it maintains a bullish outlook for 2022.

“As an investor, you need to be aware that despite the fears we see in the headlines, there is this calculation behind this discounting mechanism that shows you a constructive outlook in 2022,” she explained. . Regarding inflation, Chisholm thinks that we are “peaking in the sense that the tailwinds that we have seen for inflation over the past year not only are dissipating but turning into headwinds in 2022 “.

Fidelity’s Chisholm is bullish in 2022

Chisholm expects an average deceleration in inflation this year compared to last year. In addition to the dissipating inflationary headwinds above, an appreciating dollar would dampen inflation further. She also believes inventories are expected to catch up with sales in 2022 – another positive for slowing inflationary pressures.

That said, investors can expect market leadership rotation away from tech stocks, she noted. “The story behind the technology is historically unique, in that during the pandemic their stocks actually became cheaper on a relative basis to the market.”

But now, she added, “we’ve essentially reversed all of that valuation. So, for the first time since 2005, we’re in the top quartile of the technology’s relative valuation. Usually that’s when- there you see, on average, an underperformance. ” Other factors working against tech stocks include the end of margin expansion and inflation.

Financials and energy could become top mutual funds and ETFs in 2022

Chisholm sees leadership evolving into value stocks, and in particular energy and financials. “For value stocks, decelerating inflation is very critical,” she added. She explained that if inflation remains above the historical average of 3%, “there is a much higher chance for financial stocks and a much lower chance for technology stocks (to outperform), and vice versa.” .

According to a recent report by Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, “US cyclical sectors were again favored (+ $ 4.4 billion) in December, as they had been throughout the year. year. … Finance, energy and real estate led the cyclical flows in December and for all of 2021, and they were three of the sector’s top four asset collectors (in 2021). “

AXS ‘Bassuk says volatility and uncertainty will continue this year: “We believe 2022 will be a very strong year for liquid alternative strategies. These are equity funds that offer upside potential but with some downside protection.

REITs and inflation-sensitive stocks are on the rise

He is also bullish on inflation-sensitive stocks: “Not only do they offer protection against devaluing inflation trends, but they also allow investors to profit from rising prices.” Real estate and REITs are also his choices as portfolio diversifiers.

The recently launched AXS Astoria Inflation Sensitive (IPP) is a broadly diversified, actively managed ETF that invests in cyclical stocks, commodities and TIPS to provide inflation-adjusted returns.

FlexShares senior vice president Huemmer is bullish on low volatility quality stocks for 2022. In addition, he also likes natural resource stocks as a hedge against inflation in the current environment.

FlexShares Morningstar Global Upstream Natural Resources (GUNR) is FlexShares’ largest fund with $ 6.7 billion in assets. “This is a good example of entering the upstream part of the supply chain,” he said. “Another reason we prefer natural resource stocks over raw materials is to have dedicated access to woodlands and water.”


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