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5 Index Funds Beating the Market in December

#Many investors love index funds because they provide simple, low-cost diversified exposure to the stock market. #However, picking one has become less simple as the number of indexes has grown, with more niche offerings differentiated by factors such as sector, company size, and geography.

The S&P 500, which is the most popular benchmark for the total market, had a wild year. #Following its major correction in #February and #March, a six-month bull market pushed the index back to all-time highs, but its performance has been volatile since #September. #As of #Christmas, the S&P had climbed 1.22% in #December.

#If you’re looking for ETFs that offer you opportunities to outperform the S&P 500, consider these five popular index funds, which are beating it in #December.

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#Image source: #Getty #Images

#Small caps come roaring back

The #Russell 2000 #Index is composed of approximately the 1,000th through 3,000th largest public U.S. companies by market cap. These small-cap stocks are often more volatile and less liquid than their large-cap counterparts, and they more frequently suffer from issues such as customer concentration or inferior governance. #Despite this, some will eventually grow into large caps, and their ability to multiply in size offers investors more upside potential than the established industry giants.

The #Russell 2000 lagged the S&P 500 for most of this year after falling more steeply in Q1, but it has jumped ahead year to date on the back of strong performances in #November and #December. The iShares #Russell 2000 #Index (NYSEMKT: IWM) is the most popular ETF tracking it, and it outpaced the market, producing a return of 9.27% for the month as of #Dec. 28. #This index fund has excellent liquidity with an average daily trading volume of more than $4 billion, and its 0.20% expense ratio is relatively low.

Stock chart showing performance of QQQ, IWM, VTWV, VEA, and IJR in December 2020

#Note: #Data as of #Dec. 28.

The #Vanguard #Russell 2000 #Value ETF (NASDAQ:VTWV) and the iShares #Core S&P #Small-Cap ETF (NEWS: IJR) are small-cap index funds with slightly different approaches. The #Vanguard fund holds only those #Russell 2000 stocks that have sufficiently low price-to-book ratios, and it has returned 6.65% in #December. #Meanwhile, the iShares fund tracks the S&P #SmallCap 600 #Index — its holdings are narrower, but have significant overlap with the #Russell 2000, and it has returned 7.26% so far in #December. #Both are liquid and reputable, but the iShares fund’s size and methodology give it an edge, as do its lower expense ratio and lower bid-ask spread.

#Global developed markets are up

The coronavirus pandemic has been a drag on business activity in almost every country, and foreign stocks have not been spared the pain. The #Vanguard FTSE #Developed #Markets ETF (NYSEMKT: ERROR) tracks an index of approximately 4,000 companies of all sizes in international markets. #Nearly a quarter of its allocation is to #Japanese equities, and it has significant exposure to the U.K., #Canada, #Switzerland, #France, and #Germany.

#Stock markets in other developed nations have largely lagged the U.S. market through most of this year, but they’ve outpaced the S&P in #December. The fund has returned 2.45%, nearly doubling the growth of U.S. stocks in the month. #Investors in this ETF will appreciate its extremely low 0.05% expense ratio, its 2.07% distribution yield, its low bid-ask spread, and its great liquidity with $350 million of average daily trading volume.

The NASDAQ is heating up again

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#Tech stocks, which make up nearly 65% of the NASDAQ 100 #Index, led the bull market through most of 2020. #However, ongoing economic uncertainty and investors’ concerns about lofty valuations sparked a modest sell-off in #September, and the broader market outpaced the #Nasdaq for about three months as defensive sectors like utilities gained traction.

#Opinions appeared to swing back in favor of tech stocks in #December, perhaps due to the conclusion of the 2020 election season and optimism about coronavirus vaccines. The #Invesco QQQ #Trust (NASDAQ:QQQ), which tracks the NASDAQ 100, is up 2.2% so far in #December. #That’s a decent return above the market for a single month, but it is even more noteworthy given the 30 percentage point outperformance the ETF has delivered for the full year. These gains have more than justified its 0.2% expense ratio, and investors will love the extreme liquidity from its more than $8 billion in daily trading volume.

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