Q1 2021 Review Banner

2021 Q1 Market Review

Q1 2021 Review Banner

As hopes of putting the Covid-19 pandemic in America's rearview mirror kept growing in 2021's first quarter, so did the outperformance of small-cap and value-styled stocks.

How big of a lead did these asset classes build? The IFA U.S. Large Value Index, for example, gained 14.72% in Q1 of a new year. By contrast, its sister IFA benchmark for large-cap growth stocks returned 1.49%. 

At the same time, investors who focused on the largest companies missed an even bigger story. America's small business community — as captured by IFA's U.S. Small Cap Value Index returns — led all major asset classes in the quarter, both domestically and internationally. The domestic small value benchmark generated a 25.1% return in Q1. Meanwhile, the IFA U.S. Small Cap Growth Index gained 2.56%. 

Such market leadership by small-cap stocks in a period of heightened business activity shouldn't have come as a surprise to investors. It's a pattern our investment committee has seen over longer periods as smaller companies have proven over time to be more nimble in taking advantage of local market tailwinds and broad economic expansion. 

Combined with a disciplined approach favoring stocks selling at relatively low price-book ratios (a common measure of value), the small-cap premium has revealed itself in fairly stark terms. Since early fall, a comparison of Russell index data showed that U.S. small value stocks had outperformed large growth by more than 42% through last week. Drilling even deeper, equity investors who tilted their portfolios to smaller companies and value-styled fare were amply rewarded during this period. (See table below.)

Short-Term Size and Value Differences - 7 Months, 23 Days (9/1/2020 - 4/23/2021)

Besides value and size, funds we use in designing IFA's portfolios also tilt to shares of companies exhibiting higher levels of profitability. As shown in the table below, these factors — size, value and profitabiliity — have delivered premiums to patient investors over the longer haul. 

There's another key element that came into play in the intitial quarter of 2021: You probably weren't alone in sticking with a portfolio of index funds.

For more than a decade, investors have been turning away in rather dramatic fashion from active management. (See chart below.) At the same time, an increasing number of active managers have been plagued by redemptions. By the end of 2020, total net inflow over the past 28 years (starting with introduction of the first ETF in 1993) into passively managed funds was about five times greater than those of actively managed funds ($5.5 trillion vs. $1.1 trillion). 

Domestic Equities

Domestic stocks continued to climb in the first quarter as all six of IFA's key domestic equity indexes landed on positive ground. Large value and small value stocks both produced double digit percentage gains, although at a slower pace than 2020's white hot fourth quarter. At the same time, large and small growth stocks continued to trail sister IFA value-styled domestic indexes in Q1. Notice, too, how IFA's large and small growth benchmarks registered a noticeable slowdown from Q4's double digit returns. 

International (Developed) Equities

IFA index returns from developed international markets all remained positive in Q1, although at slower pace of growth than IFA's major U.S. equity indexes. Also, unlike in the states, international large-cap value stocks outperformed small caps. For a second straight quarter, however, IFA's International Small Cap Value Index outperformed its sister blended small-cap benchmark, which includes growth-styled stocks. 

Real Estate Equities

Global real estate was another upbeat performer in Q1. In 2021's first quarter, IFA's Global REIT Index returned 6.14%. That represented a slower pace of growth from 2020's hot fourth quarter in which the diversified real estate benchmark finished with a 10.76% gain. 

Emerging Markets Equities

Just like developed foreign markets, stocks in emerging markets stayed positive in the first quarter. The key performer, however, came on the value side as the large-cap focused IFA Emerging Markets Value Index returned 8.35%. That beat a blended sister index of small-cap stocks, which gained 7.16% in Q1 and includes growth-styled emerging markets stocks. As in other parts of the world, the opening quarter of 2021 proved to be a period of less heated growth than 2020's fourth quarter.   


In the first quarter, the 30-year U.S. Treasury rate increased by 0.75 of a percentage point to 2.41% while the five-year U.S. Treasury rate increased by 0.56 of a percentage point to 0.92%. 

For Q1, IFA's fixed-income benchmarks were generally flat-to-negative. The most noticeable movement took place in short-term government bonds. In that part of the fixed-income market, the representative IFA benchmark generated a negative return (-0.85%). Meanwhile, IFA's Two-Year Global Fixed Income Index posted a slight gain (0.10%) in the first quarter.  If interest rates have fallen, the price of existing bonds can be expected to increase – so that new buyers receive the same current yield as that available from newly issued bonds at the lower rate with similar maturities and risk levels.

IFA Index Portfolios

With upbeat performances across key IFA equity categories following another quarter of growth around the world, even portfolios with heavier exposure to the middling returns of bonds finished 2021's Q1 with positive results. (All of the returns of the IFA Index Portfolios shown below are net of the maximum annual 0.90% advisory fee through March 31, 2021.) 

Each quarter, we monitor our recommended funds for clients. As part of that process, we've developed a rating system. For a summary of those results, please feel free to check IFA's Performance Monitoring Report (PMR). 

We've also created an Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and a documentary film based on the book. It also comes with a Galton Board (Stock Market Edition), which simulates the random distribution of 600 monthly returns of the IFA Index Portfolio 100. You can find the Investing Kit on Amazon.

Performance results for actual clients that invested in accordance with the IFA Index Portfolio Models will vary from the backtested performance due to the use of funds for implementation that differ from those in the index data, market conditions, investments cash flows, mutual fund allocations, changing index allocations over time, frequency and precision of rebalancing, not following IFA's advice, retention of previously held securities, tax loss harvesting and glide path strategies, cash balances, lower advisory fees, varying custodian fees, and/or the timing of fee deductions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you. For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/