Stocks and bonds have hit the skids this year, with the S&P 500 dropping 16% and the Bloomberg Aggregate bond index sliding 13%.
Some of the selling makes sense, but there are instances where investors throw out the baby with the bath water.
Bryan Armour, Morningstar’s director of passive strategies research/North America, cites “three great ETFs [exchange-traded funds] having a horrible year that should still serve as leaders of their Morningstar categories over the long haul.”
Vanguard International Dividend Appreciation ETF
(VIGI)
Morningstar rates the fund silver, its second highest rating after gold. “Foreign-stock funds have had a tough decade relative to the U.S. market, and a strong dollar continues to weigh heavily on foreign investments,” Armour wrote.
“But this fund has made the most of a bad situation, performing in the top decile of foreign large-growth funds for the year through October and the top quintile over the past five years.”
It returned an annualized 4.2% in the five years through Nov. 25 (all other figures in this story are through Oct. 31).
VIGI invests in stocks with seven years of dividend growth, “pulling in profitable companies with the capacity and willingness to make dividend payments,” Armour said.
“This strategy won’t be the highest yielding of dividend funds, but it turns in a diversified portfolio of high-quality firms, while minimizing costs for investors. [That] should make its overall performance hard to beat in the long run.”
Schwab US Large-Cap Growth ETF
(SCHG)
This fund also earns Morningstar’s silver rating. “The incredible run by large-cap growth funds came to a screeching halt in 2022. This fund was no exception, losing almost 29% for the year through October,” Armour said.
“But even this brutal start to the year hasn’t thrown it off its mark. Its three-year annualized return still exceeded 11%, good enough to fall in the top quintile of funds in the U.S. large growth Morningstar category.”
The fund invests in the faster-growing half of the U.S. large-cap market and weights them by market-capitalization, “resulting in a portfolio that’s representative of its average category peer,” Armour said.
“Its competitive edge comes from its razor-thin fee of just 4 basis points, which is hard for peers to overcome without taking on additional risk.”
Vanguard Intermediate-Term Treasury ETF
(VGIT)
This fund also receives Morningstar’s silver rating. It lost over 12% year to date through October—"a harsh reality for investors looking for Treasuries to buoy their stock portfolio during market turmoil,” Armour said.
“The silver lining is that this poor performance by the fund still ranked in the top decile of its Morningstar Category.”
Further, “like the first two funds on this list, VGIT earns its keep by providing a diversified, market-value-weighted portfolio at a low cost,” Armour said.
“And higher yields mean higher upside for VGIT—something that couldn’t be said of Treasuries for the past several years.”
