2Q Fund Review: Better, but still not easy, for investors

Investing in funds was still nerve-wracking in the second quarter, but at least it was a bit more rewarding. As the quarter comes to a close, most stock funds are showing gains, making up for losses they incurred in the first three months of the year. Surprisingly strong corporate profits and an accelerating economy helped provide support. Losses for bond funds were milder, meanwhile, and many investors with balanced portfolios came out of the spring with better returns than they had during the first quarter. Any gains investors made didn’t come easily. Worries about a possible trade war weighed on markets around the world, and the Federal Reserve surprised much of the bond market with a more aggressive plan for rate increases. How chaotic was it? Vanguard’s Total Stock Market Index fund, the largest fund by assets, had six days where it lost more than 1 percent, as of Wednesday. That’s one more than all of last year. Here’s a look at some of the trends that shaped the quarter:

GROWTH WAS KING. SMALL WAS BIG.

Profit growth has exploded. Companies in the S&P 500 reported a nearly 20 percent increase in earnings per share for the first quarter and expectations are high for similar gains for the remainder of the year. Companies that are delivering even bigger growth than the rest of the market are getting investors’ attention, and stock funds that focus on technology and other high-growth areas had some of the quarter’s best returns. American Funds’ Growth Fund of America, one of the largest growth stock funds, returned 4.8 percent for the quarter through Wednesday, for example, versus 2.6 percent for the S&P 500. The threat of a trade war between the United States and its global allies and rivals alike has hung over the market. Investors found refuge in companies that mostly do business at home, which ostensibly would be hurt less by trade restrictions than big multinationals. Enter small-cap stock funds. Interest in smaller companies drove the iShares Russell 2000 ETF to its best quarterly return since 2016, as of Wednesday. The average small-cap growth stock fund returned 8.5 percent over the last three months, easily topping the 5.1 percent and 4.2 percent returns for its large- and mid-cap counterparts, respectively.

EMERGING-MARKET FUNDS TOOK A BEATING.

Actions in Washington, D.C., had a big impact on emerging markets. Trade-war worries flared and the Federal Reserve laid out a more aggressive path for raising interest rates. In the past, higher U.S. interest rates have meant pain for developing countries. Fearing a repeat, many investors pulled their dollars out of emerging-market stocks. The largest emerging-market stock fund, Vanguard’s Emerging Markets Stock Index fund, lost 11 percent in the quarter through Wednesday for its worst loss since the summer of 2015, breaking a streak of five quarters of gains.

THE “SAFE” PART OF PORTFOLIOS WASN’T SO SAFE.

The Fed’s actions had big effects at home, too. Higher rates drag down prices for bonds. The Fed raised short-term rates again in June and signaled two more increases for 2018. As a result, many of the largest bond mutual funds are heading for their second straight quarterly loss, though most of the losses are relatively modest at less than 1 percent.