How Popular Funds And ETFs Have Previously Fared When Rates Rose

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Tom Madell
1.53K Followers

Summary

  • With the Fed ready to raise rates, most likely for a series of increases, investors should be aware of how various funds did under similar circumstances.
  • I examined the returns of 11 representative funds during the Fed's previous rate hiking cycles to see how they did when these rates rose.
  • For all of the popular funds I selected, returns were overwhelmingly positive, although some funds turned out to do extremely well, while others were nowhere nearly as good.
  • I point out which these outstanding performers were and suggest that we may well see similar results looking ahead.

Woman Looks Up At Rising Interest Rates

DNY59/iStock via Getty Images

Over the last 25 years, there have been four periods during which the Fed expressed concern over inflation, just like they have now, and started to raise short-term rates. Without a doubt, we will soon be in the 5th such period starting this March with inflation running quite hot.

In three of these previous periods, the Fed raised the Fed funds rates multiple times before stopping their inflation targeting regime. In just one of these previous periods, the Fed stopped after just a single raise. From every indication, it appears almost a foregone conclusion that multiple rate hikes will also play out this time; many believe that the Fed is currently "behind the curve" and needing to try to get inflation under control through such rate increases before it gets so high that it causes damage to the economy.

Here are the four periods with the first date being when the first rise occurred and the second one when they started to lower them, or just made no moves for at least a year. Also shown are the total number of raises during the period.

-March 25, 1997 - Sept. 29, 1998 (1 raise)

-June 30, 1999 - Jan. 3, 2001 (6 raises)

-June 30, 2004 - June 29, 2006 (17 raises)

-Dec. 16, 2015 - July 31, 2019 (9 raises)

The question investors may be asking themselves is how funds or ETFs in given categories that they may own, or are considering owning, have performed during these periods. Why? Because we can likely assume there will be similar patterns of winners and possible losers in upcoming Fed periods of multiple rate hikes.

To get data on this, I began by selecting popular funds in each of a handful of some of the more popular categories. I believe that the performances of ten stock funds and one bond fund that I selected can likely be considered to be representative of how other funds that fall in these same categories.

Choosing Representative Funds

Going back more than 20 years, most ETFs were not yet in existence. Therefore, to do a performance analysis, I selected popular mutual funds, rather than ETFs, that have been around for at least that long.

These funds, along with their class equivalents in the case of Vanguard index funds, if any, are shown below:

- Vanguard Total Stock Market Index (VTSMX), (VTI), (VTSAX)

- American Funds The Growth Fund of America® Class A (AGTHX)

- Vanguard Growth Index (VIGRX), (VUG), (VIGAX)

- Vanguard Value Index (VIVAX), (VTV), (VVIAX)

- Vanguard Small Cap Index (NAESX), (VB), (VSMAX)

- Vanguard Real Estate Index (VGSIX), (VNQ), (VGSLX)

- T. Rowe Price Financial Services Fund (PRISX)

- Vanguard Energy Fund (VGENX), (VGELX)

- Vanguard International Growth (VWIGX), (VWILX)

- Vanguard Emerging Markets Stock Index (VEIEX), (VWO), (VEMAX)

- Vanguard Total Bond Market Index (VBMFX), (BND), (VBTLX)

A Vanguard index fund's performance can always be considered highly representative of other funds within that category. For example, if you wanted to see how well a given Growth fund from a non-Vanguard company had performed, you could use VUG as your benchmark.

Readers should note that the Vanguard index mutual funds that I selected for inclusion eventually "morphed" into their newer ETF and Admiral share class of the same name. Thus, these mutual funds, ETFs, and "Admiral" funds had the identical portfolio constituents but with slightly different fee structures. For example, the Vanguard Total Stock Market Index Investor Fund (VTSMX) consists of the same portfolio as both Vanguard Total Stock Market ETF (VTI) as well as Vanguard Total Stock Market Index Admiral Shares (VTSAX). As a result, the newer share classes would reflect just about the exact performance results as the older VTSMX shares.

Next Steps

Since my purpose was to compare previous periods of multiple rate increases with what might be in store for investors now, I eliminated the one period when there was only one Fed rate increase, shown above, from my analysis.

For each of the three remaining periods, I examined the annualized total return for each of my selected funds over the inclusive period of rising rates.

Results

Below are the results for the funds in each of my chosen categories.

Vanguard Total Stock Market Index

(VTSMX/VTI/VTSAX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

- 1.9

June 30 2004 - June 29 2006

9.6

Dec. 16 2015 - July 31 2019

15.8

Average total return during the three periods: 7.8%

American Funds Growth Fund of Amer A (AGTHX,

Load Waived Class)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

19.7

June 30 2004 - June 29 2006

12.8

Dec. 16 2015 - July 31 2019

16.3

Average total return during the three periods: 16.3%

Note: If you paid an up-front load, your returns would be less.

Vanguard Growth Index (VIGRX/VUG/VIGAX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

- 8.0

June 30 2004 - June 29 2006

4.6

Dec. 16 2015 - July 31 2019

18.0

Average total return during the three periods: 4.9%

Vanguard Value Index (VIVAX/VTV/VVIAX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

3.2

June 30 2004 - June 29 2006

13.6

Dec. 16 2015 - July 31 2019

14.2

Average total return during the three periods: 10.3%

Vanguard Small Cap Index (NAESX/VB/VSMAX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

4.0

June 30 2004 - June 29 2006

13.9

Dec. 16 2015 - July 31 2019

14.5

Average total return during the three periods: 10.8%

Vanguard Real Estate Index (VGSIX/VNQ/VGSLX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

10.0

June 30 2004 - June 29 2006

29.0

Dec. 16 2015 - July 31 2019

9.1

Average total return during the three periods: 16.0%

T. Rowe Price Financial Services Fund ((PRISX))

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

17.3

June 30 2004 - June 29 2006

11.8

Dec. 16 2015 - July 31 2019

14.3

Average total return during the three periods: 14.5%

Vanguard Energy Fund (VGENX/VGELX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

22.9

June 30 2004 - June 29 2006

50.3

Dec. 16 2015 - July 31 2019

6.5

Average total return during the three periods: 25.6%

Vanguard International Growth (VWIGX/VWILX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

7.3

June 30 2004 - June 29 2006

21.0

Dec. 16 2015 - July 31 2019

13.9

Average total return during the three periods: 14.1%

Vanguard Emerging Markets Stock Index (VEIEX/VWO/VEMAX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

- 7.6

June 30 2004 - June 29 2006

39.5

Dec. 16 2015 - July 31 2019

11.6

Average total return during the three periods: 14.5%

Vanguard Total Bond Market Index (VBMFX/BND/VBTLX)

Dates

Total Return (Annualized)

June 30 1999 - Jan 3 2001

9.0

June 30 2004 - June 29 2006

3.0

Dec. 16 2015 - July 31 2019

3.6

Average total return during the three periods: 5.2%

Key Takeaways

These results should help ease investor fears about rising rates. While many investors tend to be wary of rising interest rates, this analysis of the performance of 11 mutual funds and their equivalent share classes (if any) showed that, on average, returns were in no cases negative, and in fact, as a whole, were surprisingly good.

In the case of every one of these popular stock funds, there were only three instances out of 33 (i.e., three periods times 11 funds) of negative returns, all occurring during the 2000 to 2001 bear market.

Investors looking for funds and their associated categories that have the best chance for outperforming can find them above.

Specifically, the Energy category, as represented by Vanguard Energy (VGENX/VGELX), a commodity fund, seems like a good bet. Commodities are considered good investments during inflationary periods with rising interest rates as elaborated on in this Seeking Alpha article.

Other categories of funds are shown to have done particularly well during prior periods when the Fed was raising rates:

-Real Estate funds, as represented by the Vanguard Real Estate Index (VGSIX/VNQ/VGSLX); see Rising Interest Rates Are Good For REITs, also on Seeking Alpha.

-Financial funds, as represented by the T. Rowe Price Financial Services Fund (PRISX). Such funds allow banks to make more profit from lending than when rates are low; see this article for more information.

-International funds, including Emerging Markets funds.

Also Noteworthy

Two popular Growth funds show discrepant past results, namely VIGAX and AGTHX, with latter having done much better than the former. AGTHX is a managed fund while VIGAX is an index fund. This may have allowed the former to sidestep some of the worst performing stocks during the 2000-2001 bear market. Further, AGTHX results are shown without the 5.75% sales charge which, if included for many investors, would have reduced its returns.

The data seems to indicate it likely that Value funds, as represented here by VIVAX, are likely to outperform unmanaged Growth funds during periods of rising rates, due mainly to possible Tech underperformance in the latter and cyclical stock outperformance in the latter; see here for more detailed information

Finally, the one bond fund included, VBTLX, did better than one might expect, but dividends were quite high during two of these periods as compared to today's rates. Since dividends are considered to contribute the lion's share of bond fund returns, the ability of a bond fund to have performed well during these two periods may not be representative of what is likely during this Fed hiking cycle.

This article was written by

Tom Madell profile picture
1.53K Followers
Tom Madell, Ph.D., is the publisher of Mutual Fund/ETF Research Newsletter, a free newsletter which began publication in 1999 with thousands of readers. It has become one of the most popular mutual fund/ETF newsletters on the internet, as shown here. His site has been named as one of the "Top 12 Investment Newsletters Focusing on Mutual Funds" at mutualfunds.com , an important fund information provider, under "Fund Newsletter". Also, recently his Newsletter was recognized as one of 5 expert mutual fund resources worth following offering free, and, in its case, particularly "unbiased, useful, and original advice" at http://funds-newsletter.com/fundreference-art.htm .He is also a researcher/writer/investor whose articles have appeared on hundreds of websites, including the Wall Street Journal, USA Today, Morningstar and in the international media.His articles have been among the most popular among those posted on the Morningstar.com website by non-Morningstar employed contributors.His recommendations have an outstanding, long-standing record of success . His complete list of former articles can be accessed at http://funds-newsletter.com

Disclosure: I/we have a beneficial long position in the shares of VTSAX VIGAX VSMAX VGSIX VGENX VWILX VEMAX VBTLX MUTUAL FUNDS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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