The S&P 500 index down 5.0% in January??? Small-cap value stocks, usually strongest in January, down even more at –9.3% [as measured by the Guggenheim S&P SmallCap 600 Pure Value (RZV)]??? All this coming off the worst pre-election year since the great depression???
Let’s hope the next break with history is in the bullish direction.
Year to date, the Model Fund Portfolio was down 7.7% and the All-ETF Portfolio was down 7.0% as of January 31, 2016.
I have discussed the value of real estate investment trusts (REITs) before, but the performance of the Model Fund Portfolio over the last 12 years illustrates how effective they can be. Very long-term equity REITs return about the same as the rest of the market, but they move at different times and provide excellent diversification without having to sacrifice return. In the Model Fund Portfolio, REITs are represented by the Vanguard REIT Index fund 
(VNQ): It has an average annual return of 10.3% since the portfolio’s inception, and lost only 3.3% year to date as of January 31, 2016.
The other significantly different return was that of iShares MSCI Frontier 100 (FM). The impact of lower oil prices combined with general foreign economy weakness hit the exchange-traded fund hard in 2015. That impact seems to have lessened.
There are no changes in either the Model Fund Portfolio or the All-ETF Portfolio for this quarterly review period.
Several AAII members have pointed out that many employee defined-contribution retirement plans do not permit use of exchange-traded funds. I think companies still feel that ETF tradability makes them unsuitable—or at least that is what they say. The fact that fees for non-index ETFs are lower than for the equivalent mutual funds might be a factor. The only recourse for this situation is to complain to the retirement fund administrator through your benefits department. If enough people voice an opinion, there may be a change.
Somewhat on the other side of the argument is the fact that with the growth of actively managed ETFs, the difference between market value and book value of the funds is widening. When that occurs, a whole new decision factor appears and these ETFs have to be viewed as an investor would view closed-end funds.
I should write “Guessing Forward.” I don’t think I or anyone else can make sense out of the last year. Bad things make the market go up and good things push it down. There is a lot of uncertainty about the market, the economy (here and abroad) and politics, and uncertainty is usually not bullish. However, the elimination of uncertainty can be very bullish.
If I had to choose a single indicator, my favorite would be “what are the talking heads saying?” and they almost all (in mid-February) are saying it is a bear market and that investors should reduce equity holdings. That gives me real hope that a market recovery is not far off.
We will publish our next Model Fund Portfolio update in the May issue of the AAII Journal, and by then it should be clearer. We may even know who the real candidates for president are. In the meantime, you can keep abreast of the Model Fund Portfolio here.
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