Schwab Intelligent Portfolios & Q1 2021 Market Performance¹
Transcript of the video:
Global equities were positive across the board in Q1, led by U.S. small cap stocks and more cyclical value-oriented companies poised to benefit from economic reopening.
Fundamental ETFs were among the top performers during Q1, benefiting from the value stock tailwind as a market rotation from growth to value continued.
Fixed income asset classes came under pressure due to a sizable rise in interest rates during the quarter, though rates remain far below historical averages.
More aggressive portfolios did best in Q1 as stocks outperformed bonds during the quarter, though most portfolios across the risk spectrum delivered solid returns.
How did financial markets do in Q1 2021?
What a difference a year makes! In stark contrast to the first quarter of 2020 that saw the onset of a global pandemic, a recession and the fastest tumble into a bear market in recorded history, the first quarter of 2021 brought signs of strengthening economic growth, business reopenings, declining COVID-19 infection rates, accelerating vaccine distribution and strong financial markets.
The market rally that was sparked by positive vaccine developments in Q4 continued in Q1, and broadened further beyond the small handful of consumer technology growth stocks that had powered much of the rebound throughout 2020. Global equities were positive across the board, led by small cap stocks and more cyclical value-oriented companies poised to benefit from economic reopening.
Another notable shift during the quarter was a sizable rise in interest rates in response to the expectations for stronger economic growth and potentially higher inflation down the road. While rates remain far below historical averages, the shift upward pressured bonds, highlighting the benefit of broad diversification beyond Treasuries to include additional fixed income asset classes that are less interest rate sensitive. Despite the rising rate environment, bonds remain an important part of a well-diversified portfolio, both for income and to help moderate potential stock market volatility.
Figure 1: Market performance (ranked by Q1 2021 total return)
|Index total returns (%)|
|Asset class||Q1 2021||1-Year||3-Year (annualized)|
|U.S. small cap stocks||12.7||94.8||14.8|
|U.S. real estate investment trusts (REITs)||8.7||37.5||9.4|
|U.S. large cap stocks||6.2||56.4||16.8|
|International small cap stocks||4.5||62.0||6.3|
|International large cap stocks||3.5||44.6||6.0|
|Emerging markets stocks||2.3||58.4||6.5|
|Treasury Inflation Protected Securities (TIPS)||-1.5||7.5||5.7|
|Emerging markets bonds||-3.7||9.7||1.4|
|Investment-grade corporate bonds||-4.4||7.9||6.0|
|Gold & other precious metals||-10.4||5.1||8.5|
Source: Morningstar Direct, as of March 31, 2021. Performance figures shown are total returns for each asset class during the designated period. Indexes used are: U.S. small cap stocks, Russell 2000® Index; U.S. real estate investment trusts, S&P United States REIT Index; U.S. large cap stocks, S&P 500® Index; International developed market small cap stocks, MSCI EAFE Small Cap Index; International developed market stocks, MSCI EAFE Index; Emerging markets stocks, MSCI Emerging Markets Index; High-yield bonds, Bloomberg Barclays High Yield Very Liquid Index; Municipal bonds, Bloomberg Barclays Municipal Index; Securitized Bonds, Bloomberg Barclays Securitized Index; Treasury Inflation Protected Securities, Bloomberg Barclays TIPS Index; U.S. Treasuries, Bloomberg Barclays U.S. Treasury 3-7 Year Bond Index Emerging markets bonds, Bloomberg Barclays Emerging Markets Local Currency Government Bond Index; Investment-grade corporate bonds, Bloomberg Barclays U.S. Corporate Credit Index; Gold and other precious metals, LBMA Gold Price;. Past performance does not guarantee future results. Indexes are unmanaged and cannot be invested in directly.
Fundamental ETFs benefit from market shift to "value"
As market performance leadership continued to shift from growth to value, fundamental ETFs benefited from the value stock tailwind and moved to among the top performers in Q1. Fundamental ETFs significantly outperformed their market cap counterparts during the quarter for all five major equity asset classes. The market rotation to value followed several years in which market cap ETFs led much of the time, highlighting the diversification benefit of including both types of index investments within a portfolio. Schwab Intelligent Portfolios® includes both market cap ETFs and fundamental ETFs for the five major equity asset classes to provide enhanced diversification as different investment styles move in and out of favor over time.
Economic conditions continue to improve
Economic growth expectations have strengthened significantly as vaccine distribution has ramped up — and due to a new $1.9 trillion fiscal aid package from Congress, which includes direct payments, expanded unemployment benefits, funds for school reopenings and aid to state and local governments. Unemployment has decreased as businesses have reopened, although the pace has been gradual, and millions of workers still remain jobless. While there have been many positive developments in recent months, vaccinations will take time and risks remain over new COVID-19 variants and a potential rise in infection rates.
How did Schwab Intelligent Portfolios do?
For Schwab Intelligent Portfolios, the Q1 surge in equity markets brought strong gains for most portfolios across the risk spectrum. Aggressive Growth portfolios saw the strongest returns due to their emphasis on stocks. Moderate portfolios also saw strong gains, benefiting from their balanced mix of stocks and bonds. Conservative portfolios saw more muted performance due to their emphasis on bonds, though their diversification led to positive returns for most Conservative portfolios.
Knowing which type of portfolio is most appropriate for you is a matter of understanding your goals and risk tolerance. Whether you're recommended to invest in a more conservative or aggressive portfolio is based on your answers to our online investor profile questionnaire. Schwab Intelligent Portfolios is designed to recommend a portfolio consistent with your objective, time horizon and ability and willingness to take risk, and we recommend that you revisit the questionnaire at least annually to ensure that your portfolio continues to be suitable.
Looking ahead to Q2 2021
The positive economic and vaccine developments make us optimistic for continued economic improvement throughout the year. While markets have rebounded significantly from the lows of a year ago, broad stock market valuations have also risen and gains might be more moderate going forward, with potential spikes in volatility along the way. As always, investing in a diversified portfolio based on your risk profile and staying focused on your longer-term goals while ignoring short-term market noise are among the time-tested principles for long-term investment success.
David Koenig CFA®, FRM®, is Vice President and Chief Investment Strategist for Schwab Intelligent Portfolios