Resurgence Of Growth Clears Path For Best ETFs And Mutual Funds In Q3

Growth and the appetite to take on risk returned to the stock and bond markets in June despite inflationary pressures and a slightly more hawkish tone from the Federal Reserve. Growth, energy, technology and biotech funds were among the best mutual funds and ETFs during the month.


The Fed moved up the time frame of a potential rate hike to 2023 from 2024. While this was based on higher inflation expectations, Fed chair Jerome Powell also noted that those pressures were rather transitory. He did not indicate when the bank might start reducing its bond-buying program.

Despite the announcement, the 10-year U.S. Treasury bond yield — a market indicator of future inflation expectations — ended the month down 14 basis points at 1.44%. The Nasdaq composite outperformed the other indexes with a 5.5% surge in June, for a Q2 and YTD return of 9.7% and 12.9%, respectively, according to Lipper Inc. data. The S&P 500 ended those periods ups 2.3%, 8.5% and 15.3%. The Dow was mildly in the red for June, but still up 4.6% in Q2 and 12.7% YTD.

Resurgence Of Growth For Best ETFs And Mutual Funds

“In June, we started to see a resurgence of growth performance,” said Matthew Lilling, managing director at ClearBridge Investments and co-manager of the $24 billion Vanguard Explorer (VEXPX). “We’re starting to see a little bit of dislocation between the growth and value trade … especially as companies that weren’t impacted by Covid either way are starting to perform.”

“For the first time in a while, we think companies will start to trade more on their own fundamentals in the second half of the year than on how the companies fared during the pandemic or in the reopening,” said Lilling.

U.S. diversified equity funds rose an average of 1.4% in June. They were up 6.35% and 14.88% in Q2 and YTD, respectively. Among the best mutual funds and ETFs were multi-cap growth, large-cap growth and midcap growth funds, surging between 4.6% and 5.5% during the month. They advanced between 9.1% and 12.7% YTD.

Within sector funds, U.S. and global science and technology, and health/biotechnology funds scored between 4.64% and 10.88% in June. Commodities energy funds are up a staggering 54% this year.

Small-Cap Funds Dominate Best ETFs

Among the best ETFs, small-cap funds, such as Invesco S&P SmallCap 600 Revenue (RWJ) and Invesco S&P SmallCap Value with Momentum (XSVM), were still the leaders YTD with 46%-plus returns, despite experiencing declines in June.

First Trust Natural Gas (FCG) and Invesco S&P SmallCap Energy (PSCE) surged over 12% on the month and are up more than 80% in the first half of 2021. Internationally, Brazil small-cap, Vietnam, frontier, India small-cap and emerging markets equity funds did well in June and are up between 19% and 29% YTD.

“ETFs continued to gain assets, with roughly $70 billion of inflows to ETFs in June, which would make it the most flows for June ever,” said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors. “This continued a strong quarter too. Q2 numbers are the second-best quarter ever, following record flows in Q1.”

The first half of 2021 saw $457 billion in inflows, which was 90% more than the typical first half, he pointed out. He said very strong capital deployment in 2021 as investors aimed to participate in a market rally contributed to record flows.

Riskier Assets Gain In Fixed Income

On the fixed income side, investors rewarded riskier assets as rates fell and credit spreads tightened. Corporate debt A and BBB-rated funds jumped over 1.5% in June, for a quarterly performance of more than 3.2%. However, they’re still down about 1% on the year. High yield funds also did well, surging 1.24%, 2.64% and 3.78%, respectively. Also, general U.S. Treasury funds advanced more than 2% on declining rates.

“On the bond side, one of the biggest stories was around the yield curve and the fact that we saw rates coming down, despite the comments coming out of the Fed,” said Alan McKnight, chief investment officer at Regions Wealth Management. “With inflation rising, there’s this commonly held belief that we would see a continued movement upward in the yield curve. But that went counter in June, with rates coming down.”

Fixed income ETFs had about $100 billion in inflows this year, noted SSGA’s Bartolini. “Last year, obviously, was a record-setting year for them. They took in over $200 billion” he added. He expects the strength of the first half of 2021 to carry over in the second half, with another year of over $200 billion in flows into bond ETFs.

Assets Continue To Move From Mutual Funds To ETFs

Part of the flows are explained by secular forces, such as investors moving from mutual funds to ETFs, Bartolini said. But from a tactical perspective, bank loan ETFs amassed record flows in 2021.

“The interest in senior or bank loan funds is not that large a surprise,” he said. “They do have that floating-rate component to it,” which helps when rates rise. In addition, bank loans offer slightly better yields. SPDR Blackstone Senior Loan (SRLN) yields 4%, charges 0.7% of assets in annual fees and is up 3.45% YTD.

For the next six to 12 months, Region’s McKnight believes there’s still some room to grow for equity and even credit markets: “We think because of the enormous fiscal and monetary support, that those risk assets will continue to do well.”

Within fixed income, McKnight likes high-quality investment-grade and high-yield credit, but prefers a slightly shorter duration to mitigate interest-rate risk.

Europe Shows Promise For Q3

In addition, given the improving fundamentals in Europe and because of the valuation disparity with the U.S., he believes European equities will do well. He said European markets should provide opportunities for investors for the next 12 to 18 months.

SPDR Portfolio Europe (SPEU) provides broad exposure to Western European stocks at a low cost of just 0.09% per year. The $336 million fund is up 14% YTD.

In the U.S., Bartolini likes cyclical areas such as value, small caps, banks, metals and miners. Also, balancing cyclical and secular trends such as cutting-edge technologies will provide investors with innovative areas to invest in.

“Small-cap growth companies have opportunities to create real value over time, regardless of macro externalities, if they invest in disruptive and innovative technologies,” said ClearBridge’s Lilling. Those include health care research and development, tools and consumables that go into the production and research of cell and gene therapies, disruptive cloud-based technologies, as well as consumer-preferred environmentally favorable products, he noted.


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