WEEKLY BRIEF | Beyond the Usual Suspects

Hello, and welcome to the IVA Weekly Brief for Wednesday, June 3.

There are no changes recommended for any of our Portfolios.

Here’s a stat that did not surprise me: Information Technology ETF (VGT) is Vanguard’s best-performing fund this year, up 33.6% through Tuesday night.

Here's a number that surprised me: Vanguard’s best-performing large-growth index fund this year, S&P 500 Growth ETF (VOOG), ranks #34 out of the fund giant’s roughly 200 funds. Not one large-growth index fund cracks the top 30.

For the past several years, large growth funds, fueled by large positions in giant tech stocks, have dominated the market. That relationship has broken down—though you wouldn’t know it from the headlines. (David Snowball at Mutual Fund Observer noticed the same thing scanning the broader fund universe this week. A tip of the cap to him.)

The PRIMECAP-run funds—which spent years lagging in a Mag-7-dominated market—are back in favor. PRIMECAP Core (VPCCX), Capital Opportunity (VHCOX) and PRIMECAP (VPMCX) occupy three of the top six spots, with gains ranging from 25.4% to 29.3%.  

But the story runs deeper than a PRIMECAP comeback. Near the top of the leaderboard, you'll also find Energy ETF (VDE), Pacific Index (VPADX), Commodity Strategy (VCMDX), Global Capital Cycles (VGPMX), and Emerging Markets Select Stock (VMMSX). Every one of them has comfortably outpaced 500 Index’s (VFIAX) 11.7% gain.

Step back slightly, and the breadth becomes even clearer. SmallCap Index (VSMAX) is up 14.9% this year, while Total International Stock Index (VTIAX) has gained 15.4%—both ahead of the flagship 500 Index fund.

The AI trade is still alive, but market leadership has broadened. Investors willing to venture beyond the usual mega-cap suspects are finding opportunities across sectors, geographies and investment styles. And with potential IPOs from SpaceX, Anthropic, and OpenAI likely to keep attention fixed on the biggest growth stories, the headlines may not reflect that shift anytime soon.

Junk Bond Index ETF Arriving

Based on SEC filings, Vanguard will round out its high-yield lineup before the week is out with the launch of U.S. High-Yield Corporate Bond Index ETF (VCHY). It's a plain-vanilla index fund charging just 0.05% in expenses to track a diversified basket of larger, more liquid junk bonds.

That gives investors three ways to access high-yield bonds at Vanguard: the legacy High-Yield Corporate (VWEHX) mutual fund, the High-Yield Active ETF (VGHY) for those who want active management in an ETF wrapper, and now an index option.

Neat and tidy. It's also long overdue. Competitors launched index-based high-yield ETFs back in 2007.

That said, I'm not keen on buying junk bonds today. High-Yield Active ETF yields 6.31%, but Intermediate-Term Treasury ETF (VGIT) yields 4.21%—so you're picking up just 2.10 percentage points of extra yield to take on a lot more credit risk. That's not much of a cushion.

We need to take risks to build wealth, but only when we're getting paid for it—and right now, we're not.

I’ll have more for Premium Members when the ETF is trading.

Our Portfolios

Four of five Portfolios are outpacing 500 Index’s 11.7% return this year. The Aggressive Portfolio is up 14.4%, the Aggressive ETF Portfolio is up 12.2%, the Growth Portfolio is up 13.0% and the Moderate Portfolio is up 12.8%. Only the Conservative Portfolio, which holds less than half its assets in stocks, is (understandably) lagging the flagship stock index fund with a 7.4% gain.

This compares to a 12.0% return for Total Stock Market Index (VTSAX), a 15.4% gain for Total International Stock Index (VTIAX), and a 0.4% return for Total Bond Market Index (VBTLX). Vanguard’s most aggressive multi-index fund, Target Retirement 2070 (VSNVX), is up 12.2% for the year, and its most conservative, LifeStrategy 20/80 (VASIX), is up 3.1%.

IVA Research

On Monday, I published my June Monthly Recap—The Ride Is Part of the Deal. Tech stocks are surging and the semiconductor rally has gone global, but even the biggest winners are hard to own: Micron is up thousands of percent since 2007—by way of six separate 50%-plus crashes. The message I keep returning to: participate in the AI trade without betting the house on it.

Yesterday, I tackled a question several long-time readers have raised: Have I given up on active management in favor of index funds? The short answer is no—but my thinking has evolved, and I lay out the framework I use to decide when an active fund earns its place over a simple index fund.

Until my next IVA Weekly Brief, have a safe, sound and prosperous investment future.