Performance Commentary

Highlights

• Portfolios with higher allocations to domestic, large-cap, and growth equities significantly outperformed their peers over the past year.
• A strategic focus on domestic large-cap equities and municipal bonds drove superior performance over the past three years.
• Strong U.S. market performance led portfolios emphasizing domestic large-cap equities to consistently outperform over the past seven years.
• Longer-duration bonds enhanced fixed-income performance over the past year.
• High-yield bonds drove fixed-income outperformance over seven years.

Backdrop

The S&P 500 Index rose by 5.89% in the third quarter of 2024, hitting new all-time highs after a brief summer sell-off in risk assets. Value stocks led the index higher, with small-capitalization companies outgaining their large-cap counterparts. The shift in leadership is a healthy development and a key sign of broadening participation beyond the Magnificent Seven stocks. Additionally, economic data is signaling a soft landing. The Federal Reserve Open Market Committee (FOMC) lowered the federal funds rate by 50 basis points at their September meeting, bringing the target range to 4.75% – 5.00%. Jerome Powell, the Chairman of the Federal Reserve, emphasized the balance of the institution’s dual mandate as inflation readings approach their target 2% level and the labor market remains generally stable as pandemic-era tightness abates without spiking unemployment.

The recalibration of monetary policy is met with data supporting that a soft landing is in sight, such as the most recent U.S. GDP report from the Bureau of Economic Analysis that topped economists’ estimates. To achieve the soft landing, the FOMC wants to ease financial conditions to ensure the labor market does not weaken further while stimulating economic growth. Market participants are pricing in another 50 basis points of cuts across the final two Fed meetings of 2024.

International equities outperformed domestic equities in the third quarter of 2024. The MSCI EAFE Index returned 7.37% in the quarter, while the MSCI Emerging Markets Index returned 8.86%. China’s economic woes of a struggling real estate market, dismal stock market performance, high youth unemployment rates among recent graduates, and fears of deflation led to an unprecedented all-in government response. The comprehensive plan was met with investor enthusiasm to end the quarter.

In fixed-income markets, the third quarter brought a tailwind following the long-anticipated FOMC decision to cut the federal funds target rate. Bond prices rallied into quarter-end and delivered a strong total return for the period as the Bloomberg U.S. Aggregate Bond Index posted a 5.20% gain. The U.S. 10-year Treasury finished the quarter more than 60 basis points lower at 3.81%. Investment grade outperformed high-yield credit in the third quarter.

Large-Cap Domestic Growth Drives One-Year Performance for TD Automated Investing, Betterment Climate Impact SRI, and Merrill Guided Investing SRI

Over the past year, TD Automated Investing, Betterment Climate Impact, and Merrill Guided Investing have emerged as top performers in terms of overall portfolio returns, as allocations to large caps, domestic, and growth equities have all played large roles.

Growth stocks played a pivotal role during the period, with the Russell 3000 Growth Index delivering a remarkable 41.46% return, significantly outpacing the Russell 3000 Value Index’s 27.62% gain. Betterment’s climate impact strategy and Merrill Guided Investing maintained slightly above-average allocations to growth stocks, with exposures of 30% and 29%, respectively, while TD Automated Investing held an average weight of 27%. SoFi emerged as a top performer in the equity category, benefiting from its high allocation to growth stocks; its portfolio has 41% allocated to growth compared to an average of 27% for the robos we track. These strategic allocations allowed them to capitalize on the robust performance of growth sectors during this period.

Large-cap stocks significantly outperformed small-cap stocks. The Russell 1000 Index, representing large-cap equities, returned an impressive 35.66%, overshadowing the Russell 2000 Index’s 26.74% return for small-cap stocks. Betterment stood out with an 84% allocation to large-cap equities, substantially higher than the average robo-advisor allocation of 69%. TD Automated Investing also exceeded the average with a 78% allocation, while Merrill matched the average at 69%. This emphasis on large-cap stocks allowed these portfolios to capitalize on the strong performance of market leaders.

Domestic equities outperformed international markets, with the S&P 500 returning 36.33%, outpacing the MSCI EAFE Index’s 25.46% return. Merrill and TD Automated Investing had substantial domestic equity exposures of 75% and 73%, respectively, both surpassing the average robo-advisor allocation of 67%. This strategic positioning in domestic markets contributed significantly to their overall performance. Betterment, with a 61% allocation to domestic equities, also benefited, although its exposure was slightly below the average.