Bulletin
Investor Alert
John Prestbo

John Prestbo's Indexed Investor Archives | Email alerts

July 7, 2015, 6:01 a.m. EDT

Stay on top of your portfolio even when stocks lose balance

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    iShares Russell 3000 ETF (IWV)
  • X
    iShares Dow Jones U.S. ETF (IYY)
  • X
    SPDR S&P 500 ETF Trust (SPY)

or Cancel Already have a watchlist? Log In

By John Prestbo


Getty Images

Every six months or so, it’s a good idea to poke your head up out of the trenches to see what’s going on. At this midpoint of 2015, the stock market terrain looks fairly battle-scarred.

Not to mention confusing. If you asked what the overall market did over the past six months, the answer could vary by two percentage points. The performances of ETFs based on market benchmarks were mixed, to say the least. Here’s a sampling, measuring this year through June 30:

Index (ETF Symbol) Pct. Chg.
Russell 3000 /zigman2/quotes/208731962/composite IWV ) 1.9%
DJ U.S. Market /zigman2/quotes/200309091/composite IYY   1.8%
S&P 500 /zigman2/quotes/209901640/composite SPY   1.2%
DJ Industrial Avg. /zigman2/quotes/208954582/composite DIA   -0.1%
CRSP Total Market /zigman2/quotes/202677318/composite VTI   1.9%

Two of them agree, which doesn’t always happen, and a third is close. But the other two — which happen to be the best-known U.S. market indicators — are not on the same page.

Digging deeper doesn’t help clear up matters. Everybody knows large, medium-sized and small stocks behave differently, but some investors may be surprised to learn that differences can occur within a single category. The following table gives three examples for each size segment:

Large Cap Symbol Pct. Chg.
   SPDR S&P 500 SPY 1.2%
   iShares Core S&P 500 IVV 1.2%
   iShares Russell 1000 IWB 1.7%
Mid-Cap
   SPDR S&P Mid-Cap 400 MDY 4.2%
   iShares Core S&P Mid-Cap 400 IJH 4.4%
   iShares Russell Mid-Cap IWR 2.3%
Small-Cap
   SPDR S&P Small-Cap 600 SLY 5.0%
   iShares Core S&P Small-Cap 600 IJR 4.8%
   iShares Russell 2000 IWM 5.3%

The good news is that there is consensus on direction if not degree. ETFs based on the same S&P indexes performed similarly, which is a beam of rationality in an often-mysterious market. But change the index brand to Russell and we get superior results in two segments and inferior in the third.

Russell fell short in the mid-cap segment, which is interesting because that segment didn’t exist when Russell first created its indexes. It had the big-stock 1000 index and the small-stock 2000 index. Later, when some customers wanted midcap, Russell carved that segment out of the smaller large-caps.

As a result, Russell’s midcap index is a “subset” of the 1000 index, consisting of the smaller 800 of the 1000’s components, or 31% of the 1000’s market capitalization. If you own the 1000 you also own the mid-cap segment. In this year’s first half, that range of stocks happened to be the weak link in performance.

Performance disparities don’t necessarily blur the big picture. Growth stocks were clearly in the driver’s seat in the first six months and value stocks lagged. From an ETF perspective, however, precision is problematic.

Growth Symbol Pct. Chg.
iShares Core U.S. Growth IUSG 4.6%
First Trust Multi Cap Growth FAD 5.4%
Value
iShares Core U.S. Value IUSV -0.4%
iShares MSCI USA Value Factor VLUE 1.5%
First Trust Multi Cap Value FAB -0.6%

The same is true of sectors, with the additional complication of the two most popular ETF sector families being based on different classification systems. The result is comparison confusion, particularly in the consumer sectors and technology.

iShares U.S. Sector Funds Select Sector SPDRs
Symbol Pct. Chg. Symbol Pct. Chg.
Consumer Services* IYC 5.2% XLY 7.5%
Consumer Goods** IYK 1.7% XLP -0.3%
Energy IYE -4.6% XLE -4.2%
Financials IYF 0.0% XLF -0.6%
Health Care IYH 10.1% XLV 9.1%
Industrials IYJ -0.3% XLI -3.4%
Materials IYM -1.7% XLB 0.3%
Technology IYW 1.1% XLK 1.2%
Telecommunications^ IYZ 1.0% -- --
Utilities IDU -11.4% XLU -11.1%
*The SPDR sector is called Consumer Discretionary.
**The SPDR sector is called Consumer Staples.
^Telecom is not a separate sector in the Select Sector SPDR family; these companies are included in the Technology sector, accounting for more than 10% of market capitalization.
  

The two sector families agree that health care was the best performer and utilities were the worst. But they disagreed on materials and were far apart on industrials. The discrepancy in the consumer segment partly stems from consumer goods and consumer staples not being exactly the same thing.

Here are some takeaways from all this. The first and most important is that benchmarks don’t march in lockstep because they take different approaches to measuring the market. That, in turn, means you should pick a benchmark that looks the most like your portfolio — and stick with it.

Second, ETFs are unreliable substitutes for indexes, including those they are based upon. Most ETFs underperform their indexes because of management fees and trading costs. But a few occasionally outperform because they make extra money by lending out their shares to short-sellers and others.

Third, there is always a certain amount of mixed signals or outright ambiguity in the market, so you might as well get used to it. You can do that by formulating an investment strategy and executing it — and only it — until you reach your goals. Avoid chasing distractions, which the market manufactures daily.

John Prestbo is retired as editor and executive director of Dow Jones Indexes, now part of S&P Dow Jones Indices, in which Dow Jones & Co., publisher of MarketWatch, holds a small interest. Mr. Prestbo also is an adviser to MarketGrader Capital, which scores stocks on the basis of fundamental factors and chooses components of the Barron’s 400 Index.

/zigman2/quotes/208731962/composite
US : U.S.: NYSE Arca
$ 270.39
+0.11 +0.04%
Volume: 148,577
Jan. 14, 2022 4:10p
loading...
/zigman2/quotes/200309091/composite
US : U.S.: NYSE Arca
$ 114.67
-0.04 -0.03%
Volume: 52,424
Jan. 14, 2022 4:10p
loading...
/zigman2/quotes/209901640/composite
US : U.S.: NYSE Arca
$ 464.72
+0.19 +0.04%
Volume: 95.89M
Jan. 14, 2022 4:00p
loading...
/zigman2/quotes/208954582/composite
US : U.S.: NYSE Arca
$ 359.14
-2.06 -0.57%
Volume: 8.58M
Jan. 14, 2022 4:00p
loading...
/zigman2/quotes/202677318/composite
US : U.S.: NYSE Arca
$ 235.02
+0.09 +0.04%
Volume: 3.83M
Jan. 14, 2022 4:00p
loading...

This Story has 0 Comments
Be the first to comment
More News In
Investing

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.