Exchange traded funds, or ETFs, are well-known as a useful tool for providing investors with a low-cost way to invest in a wide variety of targeted indexes. Less well-appreciated is how useful they can be in providing information about market behavior. Here is an example. The table below presents return data on a number of widely held ETFs both year-to-date and over the last five years. The table highlights several salient features of recent market behavior.
1. All bonds, both short- and long-term and U.S. and international have done poorly in the year-to-date. Over the last five years, long-term U.S. bonds have done relatively well but short-term bonds and international bonds have lagged.
2. U.S. stocks have done astonishingly well. During the last five years they have returned over 17% per year. This is true of both small cap and large cap stocks. Even after this extraordinary run-up, current performance remains strong with returns approaching 10% year-to-date.
3. The U.S. experience does not extend to the rest of world. Average returns over the last five years are on the order of 4%. Year-to-date returns are negative. The performance of emerging country stocks has been particularly bad with year-to-date returns down 13%.
4. Within the U.S. market certain sectors have accounted for much of the strong performance. At the forefront are informational technology and health care stocks which have provided remarkable returns on the order of 19% over the last five years and year-to-date. Other sectors have not performed as well. For instance, the table shows many are down year-to-date.
Investors may react to this table in different ways, but at Cornell Capital it gives us further reason to be cautious. Counting on the same sectors of the U.S. market to drive future returns given that the massive past run-ups have led to high valuations does not seem wise. It may be time to look at other sectors, and other countries, that have not performed so well in recent years.