Model Mutual Fund and ETF Portfolios: Value and Small Stocks Impact Returns


Once again, the past quarter saw the market change direction dramatically. This time, happily, the change was strongly to the upside.

As can be seen in Tables 1 and 3 on pages 30 and 31, both the Model Mutual Fund Portfolio and the Model ETF Portfolio outperformed their benchmarks year-to-date as of January 31, 2012.

However, the turn to the upside was not strong enough to overcome the weak third quarter of last year. Both model portfolios underperformed for 2011, as shown in Tables 2 and 4.

Figures 1 and 2 give a graphical representation of the portfolios’ performances compared to their benchmarks.

The underperformance of both portfolios is largely due to the inferior short-term performance of value stocks and small-cap stocks. Since small-cap and value stocks have always proved superior in the long run, they are emphasized in the model portfolios. As a result, the model portfolios pay a price during the occasional periods when small caps and value stocks underperform. With the recent turnaround in the market, smaller-cap and value stocks have led the way up, and we expect to see that continue.

Read more »