Solid Earnings Season Lifts Mutual Funds And ETFs To Sharp Gains

A solid earnings season helped lift stock markets to record highs in October despite some underlying supply constraints and a slower-than-expected recovery in certain sectors. Many of the best mutual funds and ETFs shined again despite some trepidation earlier in the month.


“We’ve been pleasantly surprised at the amount of companies that are actually beating expectations, and the level of sales and earnings growth that are coming through at the individual company level,” said Timothy Skiendzielewski, investment director at Abrdn. “The market continues to shrug off these inflation and supply chain issues and push to new highs.”

He said that despite the GDP growth in the third quarter decelerating vs. the second quarter, stocks continued to reach record highs. “There’s a view that despite the supply chain issues, demand will remain strong enough going forward.”

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U.S. Stock Funds Soar, Led By Growth And Large Cap

U.S. diversified equity funds soared 5.35% in October for a yearly return of 20%, according to Lipper data. Among the best mutual funds were equity leverage, large-cap core and growth, as well as multicap growth funds, surging between 6.7% and 9.8% on the month. The best-performing funds for the year were equity leverage and small-cap value funds, with 30%-plus returns.

Major indexes hit new highs, with the S&P 500 surging 7%, the Nasdaq 7.29% and the Dow Jones 5.84%, respectively. The S&P 500 is on track to be the best-performing major index for the year, up 24% YTD.

Among the best ETFs were also those focused on large caps and growth. Nuveen ESG Large-Cap Growth (NULG), Invesco S&P 500 Pure Growth (RPG) and iShares ESG MSCI USA Leaders (SUSL) topped the list with 9.3% to 10% returns for the month. They’re up around 30% YTD. Invesco S&P SmallCap Value with Momentum (XSVM) is the best ETF this year, having surged 52%.

Best Mutual Funds And ETFs: Energy Funds Gain

Within sectors, while energy funds are still the big winners on the year, renewable energy and innovative technologies surged during the month. Amplify Transformational Data Sharing (BLOK), First Trust Nasdaq Clean Edge GreenEnergy (QCLN), VanEck Rare Earth/Strategic Metals (REMX) and Amplify Lithium & Battery Technologies (BATT) returned between 14.23% and 24.26% last month.

“Some of the Covid-affected industries — like travel, airlines — the recovery petered out a little bit (in October) and started to recover a bit more slowly than we were hoping for,” said Patrick Venanzi, lead manager of Fidelity Small Cap Growth (FCPGX). The sectors that outperformed, such as energy, materials, financials and real estate, “I classify all those sectors as beneficiaries of inflation and higher interest rates.”

Fidelity Small Cap Growth is among the best mutual funds and ETFs.

Top holdings in FCPGX include Crocs (CROX), BJ’s Wholesale Club (BJ) and TechTarget (TTGT). Resin footwear maker Crocs is on IBD 50 stock list and is up 158% YTD through October. The $6.6 billion fund rose 5.54% in October and is up 16.8% this year. It charges an annual fee of 1%.

‘Profit-Driven Growth’ Will Fuel The Best Mutual Funds And ETFs

Venanzi says it’s important to distinguish between profitable and unprofitable companies. He manages his fund against the Russell 2000 Growth index.

“The proportion of companies in that benchmark that are unprofitable has increased dramatically over the past 10, 20, 30 years,” he said. “And today, more than half the companies in the Russell 2000 Growth benchmark are unprofitable. Only 46% of companies (in the index) are profitable. In 2013, that was 65%, in 2006 it was 80% and back in 1994 it was 85%.”

He explained this decline in profitability is due to too many new issues and IPOs, as well as SPACs. Many of the companies that came to market were unprofitable, especially biotech and software.

Despite this, he believes demand is still pretty strong, consumers have saved a lot during Covid and housing inventories remain low. Venanzi also thinks the current bottlenecks will be resolved, although the timing remains uncertain. In addition, “Those really dark days of the Covid lockdowns — it was hard to say then, but they were temporary.”

Supply Chain And Inflation Challenges Ahead

Abrdn’s Skiendzielewski believes the supply chain challenges and inflationary pressures will not be alleviated before 2022. “But up to this point — with this being an issue for two quarters now and companies largely being able to deal with those issues — even though earnings growth will likely decelerate going forward after growth peaked in Q2, we’re still in an environment where earnings growth is still going to be fairly robust into 2022.”

He still likes the technology sector, despite its strong run over the past multiyear period. He believes tech will continue to power the economy. In addition, Abrdn integrated environmental, social and governance (ESG) analysis into its assessment of companies in the past three years to mitigate risk and improve returns.

“We believe that companies that focus on their key ESG risks are better companies,” he said. “They have better corporate performance, and better shareholder returns over time.”

More Best Mutual Funds And ETFs Are Investing in ESG

Aberdeen US Sustainable Leaders (GXXAX) invests in current or emerging sustainable leaders. Top holdings include Microsoft (MSFT), Tetra Tech (TTEK), Mastercard (MA), SVB Financial (SIVB) and RingCentral (RNG). Microsoft is part of IBD’s Leaderboard leaders list.

The $523 million fund was up 7.31% in October and 23.19% YTD. It charges an annual fee of 1.19%.

On the bond front, the yield curve flattened slightly, with the 10-year U.S. Treasury yield picking up 3 basis points to end the month at 1.55%. Most bond funds were flat to slightly negative. U.S. Treasury Inflation Protected Securities (TIPS) funds rose 0.82% in October for a YTD gain of 4.4%.

“The Federal Reserve and Chairman Powell have done quite a good job threading the needle the past several months,” said Anders Persson, CIO of global fixed income at Nuveen. “I think they’ve done a very good job striking a balance around reassuring the market that they’re mindful of the key risks at hand, but also giving enough detail about the tapering timing and what they’re looking for, both to get started and when to wrap up.”

The Market Is Pricing In Two Rate Hikes Next Year

On Nov. 3, the Fed announced it would start tapering bond purchases by $15 billion per month starting later this month and until mid-next year. It said it expects inflation to persist well into next year, and then to begin receding in the second or third quarter of 2022.

“My view would be that the rate-hike discussion and speculation is a lot more controversial in the markets,” he added. “The market is pricing in two rate hikes next year, which we feel is a little bit aggressive. We feel like that’s moving too quickly. Our view is that the Fed is going to wrap up the tapering and take a bit of a pause and then reassess.”

He also believes that while inflation is not fully transitory, it is mostly transitory and manageable. He’s still constructive on the corporate credit parts of fixed income vs. government bonds and mortgages. He’s comfortable focusing on somewhat lower quality vs. higher quality, shorter vs. longer duration and reaching for extra income.

He likes leveraged loans due to their floating rate characteristics and yields over 4%, collateralized loan obligations and preferred securities. Nuveen Floating Rate Income (NFRIX), Nuveen Preferred Securities and Income (NPSAX) and TIAA-CREF Inflation-Linked Bond (TCILX) offer some of this exposure.


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