VWO - Which Funds In My Portfolio Have The Best Short-Term Prospects

2023-08-08 21:50:15 ET

Summary

• Short-term performance results can offer additional profits and may be correlated with long-term performance.
• Evaluating different segments of the market allows for adjustments in portfolio holdings.
• Large-cap growth funds have been performing well, while international stocks and money market funds are also worth considering.
• My bond funds have been performing poorly, with one exception.

While the title of this article may appear to go against what my Newsletter has advocated for over two decades, that is, focusing on the long term, looking at the short term can offer additional profits as well.

Performance results from the short term are often highly correlated with those from the long term. And sitting on a fund (ETF or mutual fund) that is doing poorly for as much as a year's time or so, can be frustrating and some investors may want to pull out, thinking that the trend may continue.

My portfolio is much larger than that of most investors, something that might draw scorn. But it gives me the opportunity to evaluate how different segments or categories of the markets are doing. While I maintain a core of strong funds acquired and held down through the years, there is always room for adjustments. For example, a poor year for many value category stocks, such as we had in 2022 and continuing into this year, may convince me to pull back somewhat from such funds.

Perhaps there might be a better place to "hide out in," at least for the short term. For example, Vanguard Value ETF's ( VTV ) performance so far this year has been a mediocre 4.44%. (Note: All performance figures cited in this article are through 8-4.) On the other hand, a managed mutual fund, such as Vanguard Windsor II ( VWNFX ) has returned 13.33 with a good return last year as well. My having so many funds to choose from in my portfolio may seem to go against the typical advice, but it gives me a broad perspective on what choices seem to be working and what aren't.

So let's begin with my stock funds. (Please note that while I have owned many Vanguard mutual funds down through the years, one will get virtually the same results, although with some possible tax advantages, with the ETF equivalents which now tend to be more popular.)

As has so often been the case over at least the last 10 years, large cap growth funds seem to have been one of the best places to be since the beginning of the year with Vanguard Growth Fund ( VIGAX ) or Vanguard Growth ETF ( VUG ) returning over 33%, not annualized. It seems that investors have become more and more optimistic that not only has the stock market recovered from the recent bear market, but that the Fed may be on track to both contain inflation and avoid a recession. And with almost the same degree of poor returns during 2022, investors seem to think that if the market is due to spring back, this category will benefit the most, which it has. But, regardless, if this happens, growth stocks are almost always a good place to be for at least a small to moderate portion of your portfolio.

Of course, another way to capitalize on large cap growth stocks is to stick with a more middle of the road fund with regard to the category, such as Vanguard S&P 500 Index Fund ( VFIAX ) or Vanguard S&P 500 ETF ( VOO ). While these funds seem to be a highly diversified blend of stocks of all categories, in actuality, it has a 38% position in the large growth category. This has contributed to its over 17.7 return so far this year, with a good return over the last year as well. Nearly the same applies to Vanguard Total Stock Market Index Fund ( VTSAX ) or Vanguard Total Stock Market ETF ( VTI ), with a total return of about 17.4 so far this year.

As I have been advocating for several years now, international stocks have continued to look good in terms of low valuations, especially European stocks. In terms of my own portfolio, a standout performer has been Vanguard European Stock Admiral ( VEUSX ) or Vanguard FTSE Europe ETF ( VGK ) with a YTD return of near the mid 3.50 range. Europe seems locked in the same type of issues as the US, only a little less advanced in a recovery cycle. This makes the category a little more volatile than US stocks, but with potentially more upside as the fundamentals catch up to those in the US.

Other international stocks in my portfolio that have shown good short-term performance are Fidelity® Overseas ( FOSFX ) (12.86 YTD), Vanguard Pacific Stock Index ( VPADX ) (9.36 YTD), Tweedy, Brown International Value Fund ( TBGVX ) (9.23 YTD), and Vanguard Emerging Markets Stock Index Fund ( VEMAX ) and Vanguard FTSE Emerging Markets ETF ( VWO ) (both about 7.8 YTD).

The laggard in the international group is T. Rowe Price Japan ( PRJPX ), returning only 3.11 YTD. With the Japanese stock market recently hitting a 33 year high, it is hard to understand why this fund has done so poorly. My advice here, based on both short-term and long-term results, is to invest instead in a recently well-performing Japanese fund, Fidelity® Japan Fund ( FJPNX ) instead (which is not in my portfolio).

My bond funds have been almost universally a disappointment over the last 12 months, although since the start of 2023, they have shown some improvement. As with stocks, it appears that investors are assuming that the worst of inflation has been licked and interest rates will soon hold steady or even begin to tick down. So why haven't bond funds done better? It appears that with most stock funds recovering nicely, investors are willing to shift out of essentially "going nowhere" bond funds and take more of their chances in stocks.

The one exception is Vanguard High Yield Corporate Bond ( VWEHX ) (no ETF available) with a YTD return of 4.92 and a small positive return over the last 12 months. This category usually gets most of its mojo from a strong stock market and this seems to be the case now too. Right now, it appears to be one of the best Vanguard bond choices available. However, if interest actually begin to drop, which I consider unlikely over at least the next 6 months, long-term bond funds, especially US treasury funds, should be your best choice going forward.

Of course, there is a third category of funds that have been a significant part of my portfolio for several years now - money market funds. As Fed-controlled short-term interest rates (that is, the Fed funds rate) have gone up for 11 times over the past 12 Fed meetings, money market funds have become an attractive alternative to bond funds, especially for the short term. Although the Fed appears to near the end of its hiking cycle, some Fed committee participants have tipped off the probability of one further increase before the end of the year. Both the three non-tax-free Vanguard money market funds (VMRXX, VMFXX, and VUSXX) are now paying over 5% with a total return for the last 12 months better than any of my bond funds. I continue to consider the Vanguard Federal Money Market Fund ( VMRXX ) (formerly the Vanguard Prime Money Market Fund), one of the best money market funds available.

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