A strong earnings season helped equity markets reach record highs in October despite some underlying supply constraints and a slower-than-expected recovery in some sectors. Many of the top mutual funds and ETFs shone again despite some trepidation at the start of the month.


“We were pleasantly surprised by the number of companies that actually exceed expectations, and the level of sales and profit growth at the individual company level,” said Timothy Skiendzielewski, Director of Investments at Abrdn. “The market continues to ignore these inflation and supply chain issues and reach new heights.”

He said that despite the deceleration in GDP growth in the third quarter compared to the second quarter, stocks continued to hit record highs. “It is believed that despite the supply chain issues, demand will remain strong enough in the future. “

Other articles and tables in this special report:

U.S. equity funds soar, driven by growth and large caps

U.S. diversified equity funds climbed 5.35% in October for an annual return of 20%, according to Lipper data. Among the top mutual funds were leverage on equities, core and growth large caps, and multi-cap growth funds, rising 6.7% to 9.8% on the month. The best performing funds of the year were leveraged funds and small cap value funds, with returns of over 30%.

The major indices hit new highs, with the S&P 500 up 7%, the Nasdaq up 7.29% and the Dow Jones up 5.84%, respectively. The S&P 500 is on track to be the best performing major index of the year, up 24% since the start of the year.

Among the best ETFs were also those focused on large caps and growth. Nuveen ESG Large-Cap Growth (NULG), Invesco S&P 500 Pure Growth (RPG) and iShares ESG MSCI USA Leaders (SUSL) lead the list with returns of 9.3% to 10% for the month. They are up about 30% since the start of the year. Invesco S&P SmallCap Value with Momentum (XSVM) is the best ETF this year, rising 52%.

Best mutual funds and ETFs: energy funds win

Within sectors, while energy funds remain the big winners of the year, renewable energies and innovative technologies jumped during the month. Amplify Transformational Data Sharing (BLOK), First Trust Nasdaq Clean Edge GreenEnergy (QCLN), VanEck Rare Earth / Strategic Metals (REMX) and Amplify Lithium & Battery Technologies (BATT) reported between 14.23% and 24.26% on the month latest.

“Some of the industries affected by Covid – like travel, airlines – the recovery slowed down a bit (in October) and started to recover a bit slower than we expected,” said Patrick Venanzi, Managing Director of Fidelity Small Cap. Growth (FCPGX). Sectors that have outperformed, such as energy, materials, finance and real estate, “I rank all of these sectors as beneficiaries of inflation and higher interest rates.”

Fidelity Growth Small Cap. is among the best mutual funds and ETFs.

The main holdings in the FCPGX include Crocs (CROX), BJ Wholesale Club (BJ) and TechTarget (TTGT). Resin shoe maker Crocs is on the IBD 50 stock list and is up 158% year-to-date through October. The $ 6.6 billion fund rose 5.54% in October and 16.8% this year. It charges an annual fee of 1%.

‘Profit-Driven Growth’ Will Power Top Mutual Funds and ETFs

Venanzi says it’s important to distinguish between profitable and unprofitable businesses. He manages his fund against the Russell 2000 Growth Index.

“The proportion of unprofitable companies in this benchmark has increased dramatically over the past 10, 20 or 30 years,” he said. “And today, more than half of the companies in the Russell 2000 Growth benchmark are unprofitable. Only 46% of companies (in the index) are profitable. In 2013 it was 65%, in 2006 it was 80% and in 1994 it was 85%.

He explained that this drop in profitability is due to too many new issues and IPOs, as well as PSPCs. Many of the companies that entered the market were unprofitable, particularly in biotechnology and software.

Despite this, he believes demand is still quite strong, consumers have saved a lot during Covid and housing stocks remain low. Venanzi also believes the current bottlenecks will be resolved, although the timing remains uncertain. Further, “Those really dark days of the Covid lockdowns – it was hard to say back then, but they were temporary.”

The challenges of the supply chain and inflation ahead

Abrdn’s Skiendzielewski believes that supply chain challenges and inflationary pressures will not be eased until 2022. Decelerating in the future after the growth spike in the second quarter, we are still in an environment where profit growth will still be quite robust until 2022. “

He still loves the tech industry, despite its strong growth in the last multi-year period. He believes technology will continue to propel the economy. In addition, Abrdn has incorporated environmental, social and governance (ESG) analysis into its assessment of companies over the past three years in order to mitigate risk and improve returns.

“We believe that companies that focus on their main ESG risks are better companies,” he said. “They have better business performance and better returns to shareholders over time.”

More and more better mutual funds and ETFs invest in ESG

Aberdeen US Sustainable Leaders (GXXAX) invests in current or emerging sustainable leaders. The main titles include Microsoft (MSFT), Tetra Tech (TTEK), MasterCard (MY), SVB Financial (SIVB) and RingCentral (RNG). Microsoft is on the IBD Leaderboard list.

The $ 523 million fund rose 7.31% in October and 23.19% year-to-date. It charges an annual fee of 1.19%.

On the bond front, the yield curve flattened slightly, with the 10-year US Treasury yield rising 3 basis points to end the month at 1.55%. Most bond funds remained stable to slightly negative. US Treasury Inflation Protected Securities (TIPS) funds rose 0.82% in October for a YTD gain of 4.4%.

“The Federal Reserve and Chairman Powell have done a good job in recent months,” said Anders Persson, CIO of global fixed income at Nuveen. “I think they have done a very good job in finding a balance to reassure the market that they are aware of the main risks involved, but also in giving enough detail on the reduction schedule and what they are looking for, to both to get started and when to end.

The market fixes its prices in two rate hikes next year

On November 3, the Fed announced that it would start reducing its bond purchases by $ 15 billion per month from the end of the month until the middle of next year. He said he expects inflation to persist until next year and then start to decline in the second or third quarter of 2022.

“My point of view would be that the discussion and speculation about rate hikes is much more controversial in the markets,” he added. “The market is anticipating two rate hikes next year, which seems a bit aggressive to us. We have the impression that things are going too fast. Our view is that the Fed will complete the tapering and take a little break, then reassess. “

He also believes that while inflation is not totally transient, it is essentially transient and manageable. He is still constructive about corporate credit shares of fixed income securities versus government bonds and mortgages. He is comfortable focusing on slightly lower quality versus higher quality, shorter or longer term and looking for additional income.

He likes leveraged loans because of their variable rate characteristics and returns above 4%, secured loan bonds and senior securities. Nuveen Floating Rate Income (NFRIX), Nuveen Preferred Securities and Income (NPSAX) and TIAA-CREF Inflation-Linked Bond (TCILX) provide a portion of this exposure.


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