Q2 2021 Review Banner

2021 Q2 Market Review

Q2 2021 Review Banner

At mid-year, global equity markets were still gaining ground. In fact, the end of 2021's second quarter marked the fifth consecutive three-month period of positive gains for IFA's stock indexes. This most recent swing of upward movement in financial markets came after the onslaught of the coronavirus pandemic resulted in double-digit percentage losses in last year's opening quarter. 

As vaccination rates climbed and Covid-19 cases fell, business activity in the U.S. continued to ramp up in the first-half of 2021. The IFA U.S. Small Growth Index returned 5.81% in the second quarter. Meanwhile, its sister benchmark of small-cap value stocks gained 4.21% in Q2.

Still, patient investors who were able to take a more strategic view of equity markets should've noticed that small-cap value remained ahead — and by a substantial amount — on the year. Despite Q2's jump by smaller growth stocks, through June IFA's index covering domestic small-cap value had a return in 2021 that was better-than 3.5 times those of its U.S. small-cap growth index. (See tables below.)

This came as many veteran market researchers along Wall Street were warning investors not to lose their discipline and become too giddy about near-term prospects. As Kenneth French, a Dartmouth professor who has frequently worked as Nobel laureate Eugene Fama's research partner, cautioned in an article ("False Negatives and False Positives") after the pandemic:

"Many patterns that look important in realized returns just happen by chance, telling us nothing about future investment opportunities. Although less extreme than the risk of false negatives in the pandemic, false positives in realized returns can have a big impact on your financial health—lowering your expected return while they cause you to pay more expenses and take more risk."

Even more to the point, IFA's wealth advisors like to explain to their clients that targeting short-term returns can put into jeopardy a person's longer-term investment goals. Instead of trying to win the lotto, leading academic research over the past 50 years teaches us that investors need to consider robust sets of data — with enough years to be considered as statistically significant — to make a really informed decision about their portfolios.

As Fama himself has observed, even 10 years' worth of data is little more than "noise." Along these lines, consider the charts below. The first shows index returns for the past decade's major asset classes. Then, look at the second chart depicting how those benchmarks wound up performing over an extended period. Using 50 years' worth of data reveals a much different picture than simply relying on winners and losers from the 2010s. 

It's certainly true our wealth advisors like to regularly conduct portfolio reviews with each client. Even so, we stress that such an ongoing dialogue is just one aspect of a much more complete and comprehensive personal planning process. That's why we offer each of our clients an individually tailored and holistic financial plan as part of IFA's investment advisor fee.

Domestic Equities

Domestic stocks continued to climb in the second quarter as all six of IFA's key domestic equity indexes landed on positive ground. Large value and small value stocks both produced healthy gains, although at a slower pace than 2021's first quarter. At the same time, IFA's large- and small-growth stock benchmarks advanced at a faster rate than sister value-styled domestic indexes in Q2. Stepping back a little to consider the entire initial six months of the year, however, showed value outperformed growth — especially in small caps. 

International (Developed) Equities

IFA index returns from developed international markets again remained positive in Q2. The biggest gainer in this category was IFA's blended benchmark for small caps. It gained 5.80%, which was less than Q1's 5.92% return. The next best performer in Q2 was IFA's index of small-cap value stocks at 4.49%, followed by the 4.17% gain of the IFA International Value Index. Both results, however, were lower than those of the previous quarter. For the year through June, it's worth noting all three of IFA's international developed markets stock indexes held double-digit gains. 

Real Estate Equities

The value of global diversification certainly showed up for investors in real estate stocks during the second quarter. While key value-styled benchmarks for developed markets realized a bit of a slowdown from the previous quarter's white-hot returns, the IFA Global REIT Index turned up the heat in Q2. It went from a single-digit gain in Q1 to a better-than 10% return in Q2. It also helped raise this index's 2021 return through June to 17.30%.  

Emerging Markets Equities

Just like developed foreign markets, stocks in emerging markets stayed positive in the second quarter. The best performer came on the blended small-cap side as the IFA Emerging Markets Small Cap Index gained 10.45%. Meanwhile, the large-cap focused IFA Emerging Markets Value Index returned 6.89%. That beat a blended sister index of large-cap stocks, which gained slightly more than 5%. While large-cap emerging markets value stocks showed slower growth in Q2, the other two emerging markets indexes (covering blended styles of small caps and large caps) produced higher growth rates as compared to the previous quarter.     

Fixed-Income

In the second quarter, the 30-year U.S. Treasury rate decreased by 0.28 of a percentage point to 2.06% while the five-year U.S. Treasury rate fell by 0.03 of a percentage point to 0.87%. 

For Q2, IFA's fixed-income benchmarks were flat-to-positive. 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 positive return of 0.31%. Meanwhile, IFA's Five-Year Global Fixed Income Index posted a slight gain of 0.18% in the second 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 generally upbeat performances across key IFA equity and fixed-income categories following a quarter of growth, IFA Index Portfolios finished 2021's Q2 with positive results. Through June, those portfolios showed even healthier gains. (All of the returns of the IFA Index Portfolios shown below are net of the maximum annual 0.90% advisory fee through June 30, 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). 

The wealth of IFA's educational materials are available for Apple iOS and Android devices via the IFA App. This free App is available to download from both the Apple App Store and the Google Play Store for Android. 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/