For the market, the focal points of the first quarter of 2022 were inflation and Russia’s invasion of Ukraine. Before the outbreak of Europe’s largest military conflict in decades, inflation hit a notable 40-year high. With an acknowledgement of inflation being less transitory than previously thought as the U.S. emerges from the corona-virus pandemic, the Federal Reserve raised interest rates for the first time since 2018.

All of the mutual funds and exchange-traded funds (ETFs) that AAII uses to track the categories of the AAII Asset Allocation Models posted negative three-month returns for the first quarter. These losses were indicative of the broader equity and fixed-income markets. Generally, this past quarter was the worst investors have faced since the early negative effects of the pandemic in 2020.

Russia’s invasion caused a surge in the prices of essential commodities, especially grains, minerals and energy resources. Bond yields resumed their upward rise in response, due to their sensitivity to inflationary pressures.

Despite two months of negativity, markets rebounded in March as Russia’s invasion slowed into a longer-term conflict and the Federal Reserve’s interest rate increase matched expectations instead of further rocking the boat.

Which Mutual Funds and ETFs Were Included?

The top 25 and bottom 25 ETFs and mutual funds shown below represent the best- and the worst-performing funds in each respective universe. Mutual funds are required to have at least $5 million of assets under management (AUM), a minimum initial purchase of no more than $50,000 and not charge any front- or back-end loads. ETFs are required to have an AUM of at least $25 million and an average daily trading volume of at least 5,000 shares. Inverse and leveraged funds were excluded. The table of the 50 most widely held mutual funds on page 27 are the funds most likely owned by AAII members, allowing you to note the performance of funds held by many individual investors.

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 easily be 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 returns. These funds were also selected for their very low expense ratios. Vanguard is unique in that many of its ETFs are separate 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 mutual funds.

Along with quarterly returns, the table below shows the one-year, three-year and five-year annualized returns and category grades for the mutual funds used to track the models’ returns. We include 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.

AAII Asset Allocation Models Funds and ETFs for First-Quarter 2022
Download the Excel Spreadsheet

Energy Fuels the Return of Many Top Performers

Broadly, the market trends are most obviously seen in the top- and bottom-performing ETFs. Since sector- and industry-focused strategies are more likely to be found among ETFs and mutual funds tend to follow broader active management strategies, it follows that there would be more diversity in the categories represented by the first quarter’s top- and bottom-performing mutual funds.

The impact that inflation had on investors’ preferences can be seen in categories of the funds with the highest first-quarter returns. Equity energy stocks accounted for 17 of the top 25 ETFs for the quarter. This category’s performance was strong enough to allow even some ETFs with three-month return grades of D (indicative of below-average returns) to make the top overall performers list.

Notably, four of the five ETFs with the highest first-quarter returns also rank at the bottom in terms of relative three- and five-year returns for their categories. This can be seen by the respective grades of F.

Equity energy funds invest primarily in equity securities of U.S. or non-U.S. companies that primarily operate in energy-related industries, such as alternative energy, coal, exploration, oil and gas services, pipelines, natural gas services and refineries.

VanEck Oil Services ETF (OIH) was the third-best-performing ETF for the quarter with a return of 52.9%. The ETF seeks to replicate the price and yield performance of the MVIS U.S. Listed Oil Services 25 index, which is intended to track the overall performance of U.S.-listed companies involved in oil services to the upstream oil sector, including oil equipment, oil services and oil drilling. These companies must generate 50% of their revenue from oil services.

With the benchmark index tracking the most heavily traded companies for oil services, the VanEck ETF’s two top holdings are Schlumberger NV (SLB) at 19% and Halliburton Co. (HAL) at 13%, accounting for about one-third of the portfolio’s holdings.

The energy equity category includes a broader assortment of resources than just oil and natural gas, but based on the geopolitical events of the first quarter, the funds in this category leading both ETFs and mutual funds are focused on those two types of energy.

The top-performing ETFs cover four categories in total: equity energy, commodities focused, commodities broad basket and natural resources. The top-performing mutual funds add a bit of diversity to the category list with the inclusion of funds representing energy limited partnership, equity precious metals, Latin America and long-short equity.

Two types of commodities funds made the top-performing funds lists for ETFs and mutual funds. The commodities focused category looks at individual commodities, such as nickel. The broad-basket commodities funds can invest in a diversified basket of commodity goods that can include grains, minerals, metals, livestock, cotton, oils, sugar, coffee and cocoa. Investment can be made directly in physical assets or commodity-linked derivative instruments, such as commodity swap agreements.

The top broad-basket commodities mutual fund was the Goldman Sachs Commodity Strategy Investor fund (GCCTX). About one-third of the portfolio’s holdings are in the energy sector, with another third in the agriculture sector and the majority of the remaining holdings in the industrial metals and precious metals sectors. The fund’s benchmark is the Bloomberg Commodity Index, which offers liquid exposure to physical commodities via futures contracts.

Top 25 ETFs for First-Quarter 2022
(Ranked by 3-Month Return)
Download the Excel Spreadsheet

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