During calm periods index fund returns across markets tend to correlate strongly. When investor confidence is high, the confidence is infectious and the FOMO (fear of missing out) means that all markets tend to bid up all at once.
It is only during volatile periods that returns in markets supported by strong fundamentals will start to diverge as seen in the best performing index funds tracking these markets and those that are weaker which were previously supported by liquidity only start to falter.
ETF or popular low cost index funds provides a cheap and easy way to access various markets.
A portfolio of index funds extends the idea of diversification across a portfolio of shares and can provide further provide diversification benefits by spreading exposure not just in a particular country (i.e S&P/ASX 50) but a number of countries.
A portfolio invested in exchange traded funds can further increase resilience and non-correlated returns in the portfolio during times of stress. The table below highlight some of the best ETFs in each major sectors. The evidence show in the post COVID-19 crisis there is a real spread in the returns between the best index funds and the worst.
Top Index Funds
|ASX||Name||YTD||6 Months||1 Year|
|Australian Index Funds|
|VAS||Vanguard Australian Shares Index ETF||-12.61%||-13.31%||-8.36%|
|STW||SPDR S&P/ASX 200||-12.76%||-13.56%||-8.74%|
|VHY||Vanguard Australian Shares High Yield ETF||-15.77%||-15.86%||-15.73%|
|US and Global Index Funds|
|IVV||iShares S&P 500 ETF||-2.14%||-1.34%||13.98%|
|VGS||Vanguard MSCI Index International Shares ETF||-5.09%||-3.96%||8.62%|
|IOO||iShares S&P Global 100 ETF||-1.74%||-0.34%||14.38%|
|VTS||Vanguard US Total Market Shares Index ETF||-3.02%||-1.87%||13.10%|
|VEU||Vanguard All-World ex US Shares Index ETF||-10.74%||-9.86%||-1.67%|
|Sector Index Funds|
|NDQ||BetaShares NASDAQ 100 ETF||13.47%||16.60%||38.61%|
|IXJ||iShares S&P Global Healthcare ETF||5.39%||5.84%||23.54%|
|VAP||Vanguard Australian Property Securities Index ETF||-22.55%||-24.67%||-23.01%|
|Fixed Income Index Funds|
|VAF||Vanguard Australian Fixed Interest Index ETF||2.35%||0.42%||2.35%|
|IAF||iShares Core Composite Bond ETF||2.15%||0.92%||2.86%|
So far in the crisis, from comparing best performing funds shows the best ETF asx listed to date has been the international ETFs which tracks the S&P 500 and the technology heavy Nasdaq.
Unfortunately for investors that thought they were protected by owning the index funds tracking the ASX. The domestic ASX indicies has fell more due to large exposure to financials and investors not liking the dividend cuts by the banks.
Another factor contributing to the outperformance of the international ETF is the fall in the Australian dollar which has buffeted a large portion of the decline where even some funds has showed positive returns to date.
Picking the right sector exposure
In the any investment environment there are always winners and losers. Sometimes it pays to narrow down market exposure to specific industry sectors. For example the financials are underperforming but they are not the worst and the table show some obvious winners as well.
Winners: Healthcare ETF and Technology ETF
It is undoubtable Healthcare and Technology sectors have outperformed as result of the Coronavirus. The shutdown accelerated shift to online from increasing streaming (Netflix) to Ecommerce (Amazon). Similarly the increase in healthcare spending has obvious positive implication on the healthcare stocks.
Obvious to pick winners in hindsight but the point is underneath the market not all the sectors have the same return.
Losers: Property ETF
The loser to date aside from the financial heavy local markets is the real estate sector. When rental income makes up a large portion of your returns and tenants suddenly stop paying rent , lets just say this has large implication on the value of your asset.
In addition, the liquid REIT market has been proxy hedging tool for those that has large unlisted real estate exposure. Sometimes you take liquidity where you can get it.
Steady as she goes: Fixed Income ETF
We included the fixed income ETF to show their relatively strong and steady risk and reward profile. While bonds are not high return investments given their higher position of the capital stack means the risk is not relative high either.
It is not always about the costs
The big 3 ETF providers State Street, Vanguard and Blackrock has cut the ETF fees so much that it almost makes a immaterial impact on return. Most of the saving in costs have already been made for those that are looking to buy index funds by switching from active managed fund to passive investments in their portfolio.
The next step is focus on portfolio allocation and to make sure the right investment exposure is made which means sometimes it make sense to have a diversified portfolio index funds.