With the quarterly performance update of mutual funds and exchange-traded funds (ETFs) for the third quarter of 2021, we are debuting changes to our regular coverage of funds in the AAII Journal. Based on member feedback, these changes alter the quarterly performance update and the monthly Mutual Fund and ETF First Cuts.

The major shift in fund coverage is to reorient it around a list of mutual funds and ETFs that members can follow over the course of the year and compare more directly. At the center of the reorientation, the list of funds comes from the AAII Asset Allocation Models. Each model features a combination of seven mutual funds and equivalent ETFs representing key market categories.

By looking at the performance of these categories, the quarterly update continues to cover domestic and international equities and bonds. Sector performance is still represented in the list of top and bottom mutual funds and ETFs in the following tables.

New Performance Tables

Previously, the quarterly update featured tables that separated the top- and bottom-performing mutual funds and ETFs into groups of domestic, international and sector equities, as well as bonds. The new tables of top- and bottom-performing funds remove this separation. The top 25 and bottom 25 mutual funds and ETFs represent the best and the worst funds in each respective universe.

Mutual funds are required to have at least $5 million assets under management (AUM) with a minimum initial purchase of no more than $50,000 and no loads. ETFs are required to have an AUM of least $25 million and an average daily trading volume of at least 5,000 shares. Inverse and leveraged funds were excluded, in addition to country-specific funds.

New to the quarterly update is the table of the 50 most widely held mutual funds as of September 30, 2021. As the most widely held mutual funds, these are also funds likely owned by members. The widely held table allows you to note the performance of funds held by the majority of investors.

One other new table shows the performance of the funds composing the AAII Asset Allocation Models (discussed in the next section) and their category averages.

AAII Asset Allocation Models

The AAII Asset Allocation Models have long served as guidelines that individual investors can use to help construct appropriate portfolios. The models incorporate three key building blocks to a successful allocation strategy: stocks, bonds and cash. [Short-term bonds are listed as a proxy for cash but can be easily substituted with cash equivalents such as money market funds, certificates of deposit (CDs), etc.]

Each model—aggressive, moderate and conservative—applies to investors with different levels of risk tolerance. The performance of the three models is based on hypothetical portfolios comprising mutual funds that represent each asset class. Vanguard index funds are used to limit the impact that decisions by active managers have on the performance. These funds were also selected for their very low expense ratios.

The table on page 29 shows the current returns. In addition to the mutual funds used to track the model’s returns, we’ve included two additional perspectives for each asset class group. The first is the category average return of similar mutual funds (e.g., large-cap blend, mid-cap blend, etc.). The second is the performance of similar Vanguard ETFs.

A Brief Overview of the Tracking Funds

Vanguard is unique in that many of its ETFs are share classes of its mutual funds. This can be seen on the company’s website where the phrase “Also available as an ETF” is listed on the pages of the Admiral share class versions of the following mutual funds.

• Vanguard 500 Index Admiral Shares (VFIAX): As the name implies, this fund tracks the returns of the S&P 500 index. The median market capitalization of stocks held is $192.8 billion.
• Vanguard Mid-Cap Index Fund Admiral Shares (VIMAX): Tracks the CRSP U.S. Mid Cap index. The 379 stocks held in this portfolio have a median market cap of $25.6 billion.
• Vanguard Small-Cap Index Admiral Shares (VSMAX): Tracks the CRSP U.S. Small Cap index. The approximate 1,500 stocks held by the fund have a median market cap of $6.2 billion.
• Vanguard Developed Markets Index Fund Admiral Shares (VTMGX): Tracks the FTSE Developed All-Cap ex-U.S. index. Slightly more than half of the 4,100-stock portfolio (53%) is allocated to European stocks, while 37% is allocated to Pacific country stocks.
• Vanguard Emerging Markets Stock Index Admiral Shares (VEMAX): Tracks the FTSE Emerging Markets All-Cap China A Inclusion index. It holds more than 5,200 stocks with Chinese stocks accounting for more than one-third of the total portfolio.
• Vanguard Intermediate-Term Treasury Index Admiral Shares (VSIGX): Tracks the Bloomberg U.S. 3-10 Year Treasury index. The fund’s 111 Treasury bonds had an average duration of 5.4 years and an average yield-to-maturity of 1.1% as of September 30.
• Vanguard Short-Term Treasury Investor Shares (VFISX): Tracks the Bloomberg U.S. 1-5 Year Treasury index. The fund’s 65 Treasury bonds had an average duration of 2.2 years and an average yield-to-maturity of 0.4% as of September 30.

We will take a closer look at these funds and discuss alternative options in future AAII Journal articles. These future articles will focus the Mutual Fund and ETF First Cuts on each fund category and its representative fund, giving a more in-depth explanation of why individual investors may want the category represented in their portfolios with a possible list of mutual funds and ETFs to choose from.

Top 25 ETFs for Third-Quarter 2021 (Ranked by 3-Month Return)

Bottom 25 ETFs for Third-Quarter 2021 (Ranked by 3-Month Return)

Third-Quarter Equity Performance Review

Investors juggled quite a bit of news in the third quarter of 2021. Economic concerns that appeared to be short-term in nature at the beginning of the coronavirus pandemic are now potentially long-term challenges.

Supply-chain issues accelerating inflation and the continued presence of the delta variant were domestic and global concerns. In addition, internationally, investors were spooked by a series of regulatory enforcements by the Chinese government and the systematic risk posed to China’s economy by the liquidity crisis with Evergrande Real Estate Group.

After the skyrocketing year-over-year performance recorded in the first quarter of 2021 due to comparison to the pandemic bear market lows in 2020, investor sentiment cooled as the fall approached. AAII’s weekly Sentiment Survey recorded a one-year bullish high of 56.9% of respondents reporting bullish sentiment for the next six months in early April. Neutral sentiment hit a one-year high of 39.7% at the end of July, which was followed by a one-year bearish high of 40.7% recorded at the end of September.

September Wasn’t Friendly to Stocks (Again)

According to Nasdaq, September is seasonally the worst-performing month for equities. As an end to the third quarter, this September did not buck the trend.

None of the equity categories represented in the AAII Asset Allocation Models recorded positive three-month average returns for the third quarter, as shown in the last table below. Among domestic equities, the large-cap blend category and the representative Vanguard 500 Index fund and its ETF (with slightly positive three-month returns of 0.6%) beat Vanguard’s index funds and ETFs for the mid-cap blend and small-cap blend categories.

Compared to their category average returns, the Vanguard Large Cap Index fund and ETF, and the Vanguard Mid Cap Index fund and ETF outperformed their peers for the quarter, while the Vanguard Small Cap Index fund and ETF underperformed their peers with returns of –2.6% compared to the category average return of –2.3%.

The small-cap blend category is still outpacing large-cap blend and mid-cap blend for average one-year return and average year-to-date return, with gains of 50.2% and 16.9%, respectively. On a one-year basis, Vanguard’s Small Cap Index fund and ETF are also ahead of Vanguard’s Large Cap and Mid Cap funds and ETFs; however, the Vanguard funds and ETFs in the latter two categories are ahead of the Small Cap Index fund and ETF year to date.

The foreign large-cap blend category average return of –2.0% fell between the mid-cap blend and small-cap blend stock category average returns of –1.5% and –2.3%, respectively. Diversified emerging markets fared the worst among domestic and international equities categories of the asset allocation models, with a category average return of –7.3% for the quarter.

Against their category average returns, the Vanguard Developed Markets Index fund and ETF, and the Vanguard Emerging Markets Stock Index fund and ETF both slightly outperformed.

Shifting focus to the top- and bottom-performing mutual funds and ETFs for the quarter (pages 26 and 27), more acute sector patterns emerge. The mix of categories represented in the top 25 mutual funds is more diverse this quarter than that of the top 25 ETFs.

Commodity-centered ETFs dominated the list of top ETFs, including both broad commodity ETFs and focused commodity ETFs. The focused commodity ETFs were primarily oil or natural gas ETFs, for which the global prices rebounded from deep lows in 2020, attributable at the time to the pandemic’s cut in demand and the purposeful supply glut from a spat between Russia and the Organization of Petroleum Exporting Countries (OPEC). In the U.S., demand for gas was up this summer and hurricanes tightened the supply at certain points.

Of note on the list of top ETFs are two cryptocurrency ETFs. These represent a growing field of investment. The Grayscale Ethereum Trust ETF (ETH) and the Grayscale Bitcoin Trust ETF (GBTC) possess enough performance history to make the list. A handful of other cryptocurrency-related ETFs failed to qualify due to having less than one year of performance history.

Looking at bottom-performing ETFs, the majority was made up of cannabis-related ETFs in the miscellaneous category and ETFs in the precious metals category, specifically silver and gold. Cannabis-related ETFs are also nascent, with many lacking three-year and five-year annualized returns. Cannabis-related ETFs were up earlier in the year on positive sentiment surrounding possible federal legalization; their appearance among the bottom-performing ETFs for this quarter could indicate a pullback from that initial bullish sentiment.

Top 25 No-Load Mutual Funds for Third-Quarter 2021 (Ranked by 3-Month Return)

Bottom 25 No-Load Mutual Funds for Third-Quarter 2021 (Ranked by 3-Month Return)

A handful of broad commodity funds were among top-performing mutual funds for the third quarter, although the list was led by the Vulcan Value Partners Small Cap blend fund (VVPSX) with a three-month return of 11.0%. Otherwise, a number of international (excluding country-specific) mutual funds made up the majority of top performers on the list, belonging to a mix of categories. These international funds all had category return grades of A for the quarter.

Of the bottom-performing mutual funds, eight funds in the precious metals category and eight funds in the diversified emerging markets category composed the majority of the list. The pullback in precious metals mutual funds and ETFs is hard to explain this quarter, considering that precious metals are normally bought by investors as hedges against inflation, which is on the rise in the short term. However, long-term inflation expectations leveled off last quarter, with inflation expectations priced into the flat yield for 10-year bonds, according to the Federal Reserve Bank of St. Louis.

50 Most Widely Held No-Load Mutual Funds for Third-Quarter 2021 (Ranked by Total Assets)

Bond Fund Performance

Comparing the bond categories represented in the AAII asset allocation models year to date, short- and intermediate-term government bonds were down due to interest rate increases and higher inflation, which push bond prices down. Longer-term bonds are more sensitive to this pressure, explaining the difference in returns between the intermediate- and short-term categories in 2021.

AAII Asset Allocation Models Funds and ETFs for Third-Quarter 2021

More on Funds

Online data on more than 24,000 mutual funds and 2,700 ETFs is updated monthly. Visit www.aaii.com/investingideas to access our mutual fund and ETF guides, lists of consistent performers, fund comparison tools and more. 

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