What has worked in 2024? The S&P 500 has reached many new all-time highs this year being up +23.7% YTD through October16, but what else has performed well to help diversified portfolios beat their bogies? I write a lot about the use of diversifiers in portfolios, so let’s take a look.
We talk a lot about small- and mid-cap equities as a way to diversify away from the mega-cap tech companies that make up a large part of the S&P 500. YTD those asset classes still lag the S&P 500, but they are making up ground since mid-July (see table below for ETFs that could be held by a typical D&A client account). For example, small- (SCHA) and mid-cap (SCHM) equities are up +5.7% and +6.7%, respectively, over the past 3-months compared to the S&P 500 (IVV) that is up +5.7%. Likewise, equities with momentum (MTUM) and minimum volatility (USMV) factors have performed relatively better being up +8.7% and +7.9%, respectively. Also, emerging market equities (SCHE, +7.4%) have started to join the party with some outsized returns helped with some stimulus we have seen in China.
We have seen the same phenomenon occur in the fixed income space with diversifying sub-sectors in fixed income outperforming core fixed income. For example, over the past three months, core fixed income (SCHZ, +2.6%) has lagged other major fixed income diversifiers like investment grade corporate bonds (LQD, +3.8%), high yield bonds (HYG, +3.7%), emerging market bonds (EMB, +4.9%), and preferred stocks (PFF, +6.7%). This relationship held fairly strongly on a YTD basis, as well!
This recent relative outperformance in diversifiers is helping D&A portfolios move strongly against their benchmarks on a recent and longer term basis. Most D&A portfolios focus on core asset classes like the S&P 500 and U.S. aggregate bonds, but a good allocation away from those core holdings should allow those portfolios to outperform over time. D&A will continue to manage portfolios with a focus on “long-term strategic asset allocation as the main driver of portfolio returns and diversification amongst asset classes as the primary means of managing risk.”