COVID Crash: ETFs That Worked

On March 23, the stock market bottomed (so far), with the Vanguard Total Stock Market ETF (VTI) down 35.0% from the Feb. 19 high, and 31% for the year, using total returns including dividend reinvestments. Through April 28, stocks recovered a bit, and are down 10.6% year to date.

Many investors, understanding that bear markets are an inescapable part of investing, were prepared. Though some of the preparation worked, some failed miserably. Let’s take a look at what worked.

What Worked

1. High quality fixed income: When stocks tank, investors typically turn to high quality fixed income. This plunge was no different. The iShares Core U.S. Aggregate Bond ETF (AGG) and the similar Vanguard Total Bond Market ETF (BND) gained 4.6 and 4.7%, respectively, year to date, serving their role as a portfolio shock absorber. By comparison, the Vanguard Intermediate-Term Corporate Bond ETF (VCIT) gained only 0.1%, and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) lost 10.2%, nearly equaling the loss in U.S. stocks. It appears that reaching for income failed yet again. Things would have been far worse for corporate investment-grade and junk had the Fed not jumped in to create liquidity.

2. Dumb beta: Smart beta overweights certain factors such as small cap and value, while what I call “dumb beta” just buys the market-cap-weighted indexes. During this plunge, as well as for the past several years, the action has been in the so-called overvalued large cap growth tech stocks. The largest large cap growth ETF, the Invesco QQQ Trust (QQQ), gained 1.6%, while the SPDR S&P 600 Small Cap Value ETF (SLYV) lost 31.6%. This continues the shocking trend as, over the past five years ending April 27, Morningstar reports that large cap growth gained 9.7% annually, while small cap value lost 8.1% annually.

3. Precious metals and mining: The reason to own precious metals and mining stocks is that they sometimes zig when the market zags. The Van Eck Vectors Gold Miners ETF (GDX) gained 15.4% for the year and worked brilliantly. I switched from Vanguard’s Precious Metals and Mining fund (VGPMX) in 2018 when they abandoned precious metals and renamed it the Vanguard Global Capital Cycles Fund. By contrast, VGPMX is down 15.8% year to date. Vanguard proved market timing can be hazardous to your wealth.

4. Discipline: It’s not easy to stick to a disciplined allocation, but it is historically effective. Selling stocks in 2019 and buying in 2020 to maintain a constant allocation worked yet again. This doesn’t mean we can’t retest the March 23 lows, but disciplined rebalancing has taken advantage of the fact that people are predictably irrational. And high quality fixed income so far this century (since Dec. 31, 1999) has bested stocks. Disciplined rebalancing is the one market timing strategy that has worked in the long run.

It's easy to predict the past, but I’ve made cases for these four categories and strategies dozens of times. Now that’s not to say all of my strategies have worked. REITs underperformed stocks, with the Vanguard Real Estate ETF (VNQ) down 18.3% year to date, and international lagged the U.S., with the Vanguard Total International Stock ETF (VXUS) dropping 16.4%.

Is This Time Different?

Though, of course this plunge is different, the same can be said about every other plunge. Still, certain strategies tend to work in both good times and bad times. Many take a lot of courage, such as precious metals and mining funds, and international diversification.

And while we are technically in a bull market, with VTI up 30.8% since March 23, the COVID crisis is far from over, with the unpredictable happening daily. Who would have predicted oil futures would have a negative value? We could merely be in the calm eye of the hurricane.

But I do predict that capitalism will survive, as neither good nor bad times last forever.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.