3 ETFs with room to maneuver

Ryan Jackson: Even the best investments can experience crises. Whether it’s because the market they’re targeting is no longer hot, a few bad calls set them back, or a combination of both, tough times are an inevitable – and unpleasant – part of investing.

But when good ETFs perform poorly, their prospects can improve. This makes the bottom of the barrel an intriguing place to look for new investments. With that in mind, here are three ETFs whose recent shaky performance gives them interesting upside potential.

3 ETFs with room to maneuver

Vanguard Total International Stock ETF VXUS
iShares Core S&P Small-Cap ETF IJR
Invesco Total Return Bond ETF GTO

Let’s start overseas with the Vanguard Total International Stock ETF, which trades under the symbol VXUS. This market cap-weighted index fund holds almost every stock on the foreign market. This broad reach and low fees earn it a Morningstar Gold rating.

This fund stands out for its diversification. Its 8,500 farms come in different shapes and sizes. The top 10 of these represent less than 10% of the portfolio, and its 20% stake in financials is its largest sector allocation. The strategy provides accurate insight into the foreign stock market, which should amplify the impact of its lower fees.

It may be harsh to say that this fund is in crisis. Over the long term, it has performed well relative to its peers in the Morningstar Category of Large Foreign Blends. The problem is that foreign stocks lag far behind their U.S. rivals, a trend that has persisted since VXUS hit the market in 2011. Over the past decade, the fund has lagged its U.S. counterpart on 83% of rolling 12-month periods.

It’s unclear when – or if – the breakout in foreign stocks will occur, but VXUS looks relatively cheap at the moment. It was trading at 15 times earnings in April 2024, compared to 24 times for the US market. This track could serve him well in the years to come.

Back in the US, let’s turn to the iShares Core S&P Small-Cap ETF, ticker IJR. This small-cap strategy has struggled recently. It gained a meager 2.1% from the start of the year through May 20, nearly 10 percentage points behind the S&P 500 and worse than 85% of its small-cap peers.

But this index strategy enjoys a Silver Medal rating for good reasons. Its benchmark applies liquidity and profitability filters that filter out much of the garbage that plagues more forgiving small-cap products. The index is also weighted by market capitalization. This cost-effective approach allows the fund to charge just 0.06% in fees, much cheaper than its active competitors.

Years of lagging large stocks have left small caps with plenty of room to grow. According to Morningstar’s price-to-fair value ratio, they were trading at a 20% discount in early May. Large caps enjoyed a discount of only 1%, which has probably already disappeared. IJR is a good way to target small caps for sale.

Persistent inflation and subsequent higher interest rates made for tough years for bond strategies. There’s no guarantee the tough times are over, but with yields near their highest levels in more than a decade, the outlook is attractive for bonds. The bronze-rated Invesco Total Return Bond ETF, ticker GTO, is a good way to capitalize.

This active offering is in the Morningstar Core-Plus Intermediate Bond Category. It lost 3.7% per year over three years through April 2024, putting it in the middle third of its peer group. It has remained virtually flat this calendar year, losing 0.2% from January 1 to May 20.

But there are reasons to be optimistic. The portfolio managers in charge have generated strong long-term results on the open version of the strategy. They are a collaborative group with a wealth of experience and resources at their disposal, a combination that merits an above average rating under the People pillar.

The team executes a strategy that combines its macroeconomic views with bottom-up credit research. The top-down component takes into account general economic and market conditions, an important backdrop for the best security ideas offered by corporate credit and securitized securities analysts. Overall, this is a sensible, repeatable strategy that should bode well if the tide turns in bonds’ favor.

Watch 3 Strong ETFs That Are Off To A Slow Start In 2024 To Learn More From Ryan Jackson.