Surprising Stats and Sound Advice on the Stock Vs. Bond ETF Derby

Who’s winning the ETF performance derby so far this year – stocks or bonds? The answer might surprise you.

Take a look at this table. It shows the performance of ten benchmark ETFs, including those that track all the major stock market indices and the biggest sectors of the bond market:

Data Date: April 19, 2017

You can see that technology stocks are clearly at the head of the pack, with the PowerShares QQQ (QQQ, Rated “B+”) sporting the highest Weiss Rating AND the best year-to-date performance at roughly 11%. But things get a lot more interesting if you scroll down further.

Yes, the SPDR S&P 500 ETF (SPY, Rated “B”) holds the second-place spot at 5.2%. But the iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB, Rated “B-”), which is a benchmark ETF for riskier, higher-yielding bonds issued by select foreign countries, is nipping at its heels with a total return of 5%.

And right behind that? It’s none other than the iShares 20+ Year Treasury Bond ETF (TLT, Rated “C-”), the benchmark ETF for long-term government bonds. Not only is the TLT actually edging out the SPDR Dow Jones Industrial Average ETF (DIA, Rated “B”) in terms of performance, it’s beating the pants off the iShares Russell 2000 ETF (IWM, Rated “B”). So is almost every other major bond ETF.

What gives? Aren’t stocks supposed to be running rings around bonds, what with the Federal Reserve raising interest rates, Donald Trump pushing growth-friendly policies, and the economy on firmer footing?

Well, stocks entered the year with a full head of steam amid optimism that Trump would get most of what he wanted very quickly: Tax cuts … infrastructure spending … massive deregulation … you name it. But after witnessing some early stumbles on health care policy, not to mention chatter that tax reform could get pushed out, investors have grown more skeptical.

As a result, the “growthier” stocks and sectors that led the bull run from November through February have taken a back seat. Money has rotated out of them and in to safer stock market sectors, longer-term bonds, and similar investments. The dollar has also stumbled, helping support ETFs that invest in foreign bonds.

More recently, uncertainly over upcoming French elections (and the implications for that country’s membership in the euro currency bloc) is leading to Brexit-like moves in certain European markets. That, in turn, is driving safe-haven buying in U.S. bonds and ETFs that track them.

But this looks like an issue with timing more than anything. While it may take longer for Trump to push through some of his policies, it’s not like he’s tossing those policies overboard. We’ve also seen various market freak outs from events like Brexit come and go over the past few years. Yet they’ve ultimately had little long-term impact, and investors who dumped their best stocks overboard ended up regretting it.

Finally, let’s talk credit spreads. A credit spread is simply the difference between the yield on an index of riskier bonds and the yield on Treasuries of comparable maturity.

When spreads widen substantially, it’s a sign bond investors are worried about rising default risks, widespread economic weakness, and other nasty fundamental outcomes. When spreads shrink or remain stable, it means investors are relatively sanguine.

Back in 2014 and 2015, risk spreads began to “blow out.” That prompted me to warn repeatedly (and correctly) about increased stock market risk. But if you look at this chart of high-yield bond spreads, you see there’s no sign of panic in the junk bond market now like there was back then. Spreads fell for more than a year beginning in early 2016, and they’re basically treading water now.

So my advice is to ignore the short-term noise. Stocks still appear likely to win this race, with stocks in the sectors I’ve highlighted leading the charge. For specific defense stock and ETF recommendations, for instance, click here. Or if you want the skinny on the best infrastructure stocks and ETFs, click here.

Until next time,

Mike and the entire Weiss Ratings team