Comparing Recent Performance of 3 Vanguard ETFs
Most investors tend to build their strategies not so much for sunny days, but to prepare for when the rain comes. It’s raining hard now, which provides some valuable perspective.
While the goal with investing surely is to make money over time, a lot of investors tend to be guided instead by confusion, which can only be remedied by seeking to deepen our understanding of the risks and benefits of various strategies to allow us to be guided more by the truth and less by myth.
There are a lot of things out there to invest in, and the best results flow to those who put a lot of thought into their actions, not just in terms of quantity but especially with quality, as if we’re not thinking about the right things properly, we can think erroneously to any length and not even discover what we are doing wrong.
People tend to strongly prefer funds, and really don’t want to build their own portfolios, and therefore our focus with this article will be to look at 3 popular types of funds to see what their relative merits may be and which type would be better overall to go with. While we may think that it’s better to hold a variety of things, we don’t want to be making inferior choices unless there is an advantage to do so, otherwise we’re just hurting ourselves on purpose, through our ignorance.
Ignorance can only be revealed when we examine what we are doing enough, and we owe it to ourselves to at least be thinking a little about what we are doing, otherwise we’ll have no idea how well or how poorly our investments are performing. We might be stuck with a real dog fund and see positive returns anyway, which may pale in comparison to what else we may have done, but we won’t be able to tell unless we at least dare to compare.
We do compare different types of funds from time to time to seek to better enlighten our readers or at least have them thinking a little more about what they are doing. Investors are always left to decide for themselves, and the biggest problem is that they generally don’t, they instead do what they are told by others. Even if they are lucky enough to be steered in the right direction here and there, not knowing what you are doing will not protect you against acting on poor advice, if you cannot separate the good from the bad.
While the situation with the market and the economy has gotten plenty ugly lately, this does provide us with a nice opportunity to vet how various approaches to investing are doing in this difficult climate, to add to whatever else we know about them, and allow this new information to further refine our thinking, and perhaps even wake us up more to some of the myths that still pervade investing.
We’ve picked three Vanguard ETFs to have a look at this time, for this purpose, which cover three main classes of funds, which are growth, value, and dividend funds. Growth funds seek growth, and while we may think that this is what investing is all about, these two other strategies do have big followings as well, value funds which look to basically hold stocks of lower value in the hopes that their value will increase, and dividend funds to focus on dividend performance over price performance.
We need to point out that the goal of all of these types is actually growth, as opposed to hedging, which involves seeking stocks that historically do not go down as much, where we are happy to sacrifice performance for smaller drawdowns. While what we give up well exceeds the benefits with this approach, and involves a great amount of misunderstanding generally, none of these three types seek this, and they are all growth funds essentially, or want to be at least.
We do look at the merits of more defensive investing in other articles, but in this one, these are all offensive-type funds, ones specifically designed to maximize returns, which does serve to simplify things. All we need to do is see who wins this game and we’ll not only know what to do but have a sense of the differences in performance between them.
However, there is always a defensive component to any investing strategy, as we still need to pay attention to this sort of thing regardless of what our objectives may be, even though for investors, a lot of these wiggles just aren’t meaningful. The one we just experienced certainly is, and those who fear the rain have ample opportunity to see how their strategy works in the rain, when it pours like it just has.
It is also simply more interesting to compare funds when we get a bear market like we just did, as it’s one thing to see how they stack up in a bull market, but when you get the bears taking over and you see stocks decline by a third on average in just a month, this is some heavy rain indeed and it can expose the weaknesses of a strategy like nothing else.
If we are worried about a certain basket of stocks being “overvalued” for instance, something that really bothers those who favor “value” funds, we want to see how these so-called overvalued stocks perform in a crisis like this, compared to those that investors think are not so overvalued, or undervalued in their minds, because this thinking forms a large part of the value investor’s creed, to avoid what they feel are the risks of higher valued stocks during a big selloff.
This idea has been so ingrained in the mind of these investors that it will cause them to shy away from performance in the best of times, and they are especially scared of pullbacks with these stocks. We definitely need to have a look at what has happened with these value funds versus the growth ones that they find so distasteful and may be so frightened of.
We’re also going to be looking at dividend funds as well, even though the very idea of focusing on one type of benefit to the exclusion of another just does not make sense, in the same way that looking at how many $10 bills you may have in your wallet is not a good way to measure how much money you have, as we need to count up the entire amount, like we need to both count dividends and price movement, as both cash out to monetary gains and losses.
Still though, there is a belief that dividend funds perform well overall, even though a lot of investors don’t even pay much attention to this and don’t even seem to care much. We are therefore including Vanguard’s flagship dividend fund alongside their value fund and a good performing growth fund of theirs, to see how they all measure up generally, and especially during this economic crisis.
We Need to Look at Both the Soundness of our Strategies and their Results
This comparison won’t just be looking at how these funds have performed in 2020, even though that in itself will surely be insightful, as it’s also about how this crisis has affected their trailing returns over longer periods. If one goes down a little more this year but has built up such a big advantage over previous years that they are still well ahead, this needs to matter as well, and we especially don’t want to make the huge mistake of looking at a brief period of underperformance and not view this out of the context of overall performance, which is the only thing that really matters when the money is counted up, how much we made or will make.
This also includes our examining not only how far a fund has fallen during the nosedive, but how much they went up prior to this and how far they have come back since, as being indicative of their overall resilience, which looking at their year to date performance accomplishes. We also need to look at longer timeframes to get a view of how they perform both in bull and bear markets, how much of a buffer that the funds may have created during the better times and how much is now left after being infected recently.
This is something we should always be doing anyway, comparing alternatives even if you already feel committed to one or the other, and do that periodically to ensure that you are in the right funds and with the right strategies at all times. This is especially needed given that a certain plan may be a good one at the time you choose it, but things may change, and you don’t want to just hang on to something that may have worked years ago but is inferior now.
People don’t really do much of this if anything generally, even though not spending a little time thinking about your investments is a bad idea indeed given that there is so much on the line. You won’t even be aware of what you may be missing unless you bother to even look, and looking is the starting point.
While we may favor certain strategies, we can never just rely on something sounding appealing to us without the proper examination of how well or how poorly something performs in real life. Even assuming that a strategy that seeks price growth is the best of the three because it actually is targeted toward what we want to accomplish, see the value of our portfolios go up, can’t be just assumed, and if this doesn’t translate to better performance, our idea was wrong and we need to look elsewhere.
We also do not want to exclude strategies just because what they seek may not be as well aligned to our objectives either, like funds preferring bad performing stocks over better performing ones, like a so-called value strategy does, or even selecting stocks without paying attention to performance like a dividend strategy would. Perhaps one or both of these strategies will outperform a growth one, and this battle always needs to be decided on the field, based upon real results.
It could end up that these bad stocks do turn better enough to make that sort of fund grow more, or ignoring performance might somehow be the best way to do if the performance of dividend stocks somehow outdoes both other types. While both of these ideas may be counterintuitive, as stocks are always a popularity contest, and if you are in the popular ones, that’s where the money is, this still needs to be vetted to ensure that it does correspond with reality.
We do need to realize that a growth fund does have a big natural advantage here as it actually does pick its stocks based upon this popularity, ones that have shown us that they are growing more, versus ones that have not demonstrated that they grow very well or ones that we’re not even selecting based upon growth. Still though, we need to see these things manifest.
A value investor might see that a growth fund outperforms their fund, and still not select the superior performance because they are worried about pullbacks, and believe that theirs does better in all weather, when we add up both the good and bad times. A dividend investor somehow doesn’t care about performance, just dividends, and in spite of this not even being rational, as they will care about how much they make or lose on their investments, we still want to put them in this battle as well so we can at least show them the mistakes they may be making.
Let the Battle Begin
Growth funds are the reigning champion here by a good margin, but let’s see how this might have changed with the new data we have this year, to see if they can hold on to the title. We picked 3 popular funds from Vanguard to represent each of these major categories, their Information Technology Index Fund representing growth, along with their Value Index Fund ETF and their High Yield Dividend Index fund representing the other two categories.
We’ll start by looking at their year to date performance, the interesting twist to this tale that will really tell us how they all stand up under pressure, and what we have seen this year definitely qualifies.
The growth fund is down by 13% year to date, which is not an exciting number at all, but still better than the 24% that the dividend fund has lost this year so far and the 25% that the value fund has lost so far this year. If you are partial to either value or dividends, this alone should make your eyes bug out, but only if you do not properly appreciate that these baskets contain weaker stocks.
This is not at all surprising to those who know how stocks really work, and we were completely confident that this is the sort of result that we would see. No one is sure where the idea of bad stocks being better in any sense came from, but it is a fairy tale in spite of how widely it is believed.
This difference isn’t just with this particular growth fund, or ones just focused on technology, as the broader iShares Large Cap Growth ETF has even done a little better at –12%. Growth funds pick good performing stocks, as that is what defines a growth stock, and better performing stocks just perform better overall.
We’ll throw the S&P 500 in there just to give us a reference, to see what beats and does not beat the market during these intervals, which also is down 13% so far this year. Our growth fund didn’t lose more than the market, but these other two funds sure did, by 11-12%. The word pitiful comes to mind here, but that’s what you get when you pick bad stocks on purpose or ones that are bad because their dividends are higher and that’s what drove them up.
We do need to take this view further out to get a better perspective, as 2020 isn’t exactly that representative of what we normally see with stocks, although it is representative of what a lot of investors fear and what scares them away from growth funds.
One-year trailing returns really separate the pack, with our growth fund returning 7% over this time. Once again, not that exciting, but still a little money made, and a whole lot better than the very ugly returns of the other two, with both of these other funds losing 15%. The market is down 3%, underperforming our growth fund by 4% but outperforming the other two by 12%.
We’ll now look at the 3-year trailing returns, with the S&P 500 setting the benchmark at 19%. Our growth fund really increased its lead here, but after all, these stocks are chosen to perform and not just a random basket like the big index is, so we shouldn’t be surprised to see it at 52%, 33% higher than the S&P.
The other two are not built to perform, so once again, it should not surprise us too much to learn that the value fund has only gained 1% over this time, and the dividend fund getting 0.09%. 52% versus 1% or basically nothing should open up people’s eyes some more.
Let’s look at one more, the 5 year returns of each, before we start throwing dirt on these other two, even though they already deserve it. 5 years is plenty long enough to settle this score and declare a winner to be sure. We want to at least give these two funds a chance to show us that they can at least make some money, and both put a total of 20% on the board, a big improvement.
The S&P 500 comes in at 34%, which has these two underperforming the market over this time by 14%. The value and dividend fund, like most funds, haven’t been beating the market, but these not only don’t beat it, they get pounded by it. Our growth fund, on the other hand, boasts a 5-year return of 81%, and instead of being clobbered by the market, it clobbered the market instead.
If any of this were even close, it might not be too unreasonable to invest in these two lesser funds, but it is not. This is just how these types of stocks work. You have your pick of the litter ones, the growth ones, an average, the S&P 500, and two funds that pride themselves in investing in either known mutts or stocks that have to be a mutt to pay these higher dividends. A mutt with a nice-looking collar is still a mutt, especially when it behaves like one as well.
It might even be hard to understand why anyone invests in mutt funds like these, or any fund in the mutt category, but people just take a liking to them it seems, like you might with a puppy, and just don’t know much about dogs or have bothered to compare theirs with the others around the neighborhood. If they were thinking that once the bears come their ship will come in by losing less, not much to dream about mind you, even that false belief has been exposed now.
The dividend folks don’t even want to pay attention, and even manage to salivate over the worst stocks in the market, and even ride them down into oblivion, losing half or more of their investment while happily clutching their few percent as they get thrown to the ground, a tip that they have earned that is supposed to not only offset these big losses but is somehow pure profit.
Presumably, you don’t have to worry about how much money that you have lost on an investment if you don’t look or care. You also don’t seem to need to worry about your fund massively underperforming competing funds, or even well underperforming the market, if you don’t bother to look.
If we really want to beat the market, we need to pick stocks that are above average, and if we instead are happy with below average ones, we should not expect to beat the market or even come close, when we choose the poor side of town on purpose like both dividend and value investing do.
Beating the market doesn’t require much skill, just a minimal sense of what we are supposed be doing when we invest, which we would have thought is to try to make money, and not have our misplaced ideas about investing trump relative performance so much that we even become blind to it. Investing with your eyes open instead is just a better way.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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