Investors Had Nowhere to Run in 2015 (But that's Okay)


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Such is the collective reaction to markets in 2015. The data below showing performance for ETFs representing major market segments show why.

Looking down the 2015 column, it's hard to get excited about much of anything. Most notably, the bellwether measure of the U.S. equity market, the S&P 500®, fell flat. On a total return basis, which includes dividends, the index climbed a bit; its primary ETF (SPY) gained 1.3%. However, on a price basis, which does not include dividends, it fell, which is why there have been so many headlines about the S&P 500 and Dow Jones Industrial Indexes being “down” for the year.

ETFDescription20153 years5 years10 years


S&P 500®






Dow 30












S&P MidCap 400®






S&P SmallCap 600®






Russell 3000®












Emerging Market Equity






Global REITs






Aggregate Bond






High Yield Bond






Foreign Bond






Emerging Market Bond























Source: Past performance is not indicative of future results.

The one important style divergence was the dominance of growth stocks over value stocks. This isn't surprising as growth tends to outperform value later in the market cycle (i.e., with economic growth waning, investors are often willing to pay more for growing revenues and profits). This explains why the NASDAQ Index performed quite well and the QQQ ETF, powered by Amazon, Alphabet, Facebook, and Microsoft, jumped 9.5% last year.

International stock markets offered mixed blessings. European and Japanese issues actually earned decent gains in local currency: the Eurostoxx 600 and Nikkei 225 gained 6.8% and 9.1%, respectively. But you only benefited from these gains if you had hedged exposure to the strong U.S. dollar, which climbed about 9% against a broad basket of major currencies. Many U.S. investors (through their mutual fund holdings) are not hedged. Thus, EFA, the popular unhedged ETF for the MSCI EAFE® Index, which includes the big cap companies from Europe and developed Asia, fell 1.0%. Emerging markets were the runt of the litter. With poor performance driven largely by weak commodity markets and a strong dollar, the top unhedged ETF for emerging markets, EEM, sank 16.2%.

What about bonds? Nope. The Barclays U.S. Aggregate Bond Index ETF was up all of 0.5%. Due to the rout in energy, high yield bonds fared worse. The largest junk bond ETF by assets, HYG, fell 5.0%.

Alternatives? Double nope. Take commodities (please). Overall, they notched another year of lousy returns thanks mostly to the steep drop in the price of oil. Many hedge funds, liquid or illiquid, fared poorly. The HFRI Fund of Funds Index was slightly in the black at the end of November and no great event happened in December to move it appreciably.

Yes, this was a year of “meh,” but I'd suggest a few perspectives on these numbers.

The first is this: Don't lose sight of the fact that these are very short-term outcomes. An entire year may sound like a long time, but it's not. There's no getting around our fixation on calendar returns (guilty!), but let's not let convention get in the way of sound reasoning.

We're looking to our portfolios to compound at reasonable rates of return over long periods of time—no one should own equities without at least a three-year, and preferably a five-year, time horizon. Yes, there are some unsettling numbers in this list, but the kind-of positive spin is that unless one made outsized bets on energy or emerging markets, portfolio-wide calendar year returns were likely flat to modestly down. A lost year perhaps, but by no means a disaster. The tough pill to swallow is that diversification doesn't always mean that you'll “average out” to solid year-in, year-out results. Sometimes, like in 2015, there's just not a lot to do.

Which leads to the second point: There were no woulds, coulds, or shoulds in 2015. There was no Hail Mary that you or your financial advisor could've thrown to earn solid returns or get measurably further ahead than the pack.

In fact, 2015 offered some of the most “compressed” returns in decades.

By that I mean diversification — the core principle behind building sound portfolios — didn't work terribly well last year since there was so little difference between winners and losers. The difference between top performing Japanese equities and bottom performing emerging market equities was about 24%. Historically, that's very low as top versus bottom asset class gaps often range between 35% and 60%. It's also unrealistic as most U.S. investors do not make meaningful single country allocations such as to Japan. While 2012 was also a year of compressed returns, we'd have to go back to 1994 to find a much tighter spread, when the best (MSCI EAFE) topped the worst (MSCI Emerging Market Index) by about 15%. In that year, just like 2015, the S&P 500 eked out the same barely positive gain (1.3%).

Generally, it's hard to imagine that few (if any) well diversified portfolios made more than a couple percentage points last year. In 2015, a classic 60/40 portfolio (60% S&P 500, 40% Barclays U.S. Aggregate Bond Index) gained 0.8%. Dial those percentage splits to whatever level you'd like; you're still going to get around 1%. If you're worried about others doing better, don't. (They didn't.)

Third, and critically, if you've had a longer-run perspective on markets, you're doing just fine. Revisit the table above and look at the trailing returns. Annualizing at low double-digit returns from the U.S., Europe, and developed Asia, the last five years have been especially fertile for global equities, excluding emerging markets. Even the decade-long view, which includes 2008 (a real disaster), is healthy. For anyone who has been methodically saving and investing with the goal of funding college, retirement, or other major expenditures, you've made real progress in recent years. The sure way to undermine this progress is to fret over short-term market moves and attempt to trade around them.

Finally, appreciate that success in investing (like in life generally) is lumpy. It comes in spurts and rarely at the time that you think it will. Hence, disappointment often reigns. After 2014, many investors expressed frustration that a well-diversified portfolio earned between 4% and 6%, while the S&P 500 gained more than 13%. On the arbitrary comparison to “the market,” most of us underperformed. (This led many who work with financial advisors to ask last year: What am I paying you for?). This year's frustration will be different, with more of a focus on absolute performance. As shown, returns were so compressed that it's hard(er) to point fingers, even when many of us likely took a small step backwards from meeting our financial goals.

In fact, a year of muted returns where not much good (or that bad) happened is an excellent opportunity to take stock of one's financial plan. (If you don't have one to begin with, it's time.) Is the plan well-calibrated to the investor's specific objectives? Is the portfolio in synch with that plan? Do the market risks you're taking have the prospect of being well-compensated over a multi-year time horizon? Do you know what those risks are? Does each individual investment make sense in the context of the portfolio?

It's the answers to these questions and not ones about why markets have recently disappointed that will put you in good stead over the long term.

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.