A new bull market in stocks may be coming. It’s no guarantee — nothing ever is — but there’s a good chance that it will happen. The first two months of this year saw stocks rally almost enough to qualify as a new bull market. Ultimately, the actual rally was just a little bit short of the definition of a bull market, and some of the gains were given up this week.
Nevertheless, the latest economic data suggests that the economy is still growing. Economic theory states that stock market returns are, in the long run, a function of gross domestic product (GDP) growth. The fact that GDP growth is still positive suggests that companies should do well, though valuations may have to adjust if the growth is lower than what was expected.
In investing, there are always uncertainties. History teaches, though, that stocks tend to go up in the long run. In this article, I will reveal two index funds that could rally in the event of a new bull market in stocks — and will almost certainly perform better than the worst-performing individual stocks.
The TSX 60
iShares S&P/TSX 60 Index Fund (TSX:XIU) is an index fund that I’ve been holding for almost five years now. It’s based on the TSX 60 — the 60 largest publicly traded Canadian companies by market cap. The TSX 60 has a lot of components in it that have been doing well lately. TSX energy stocks and utilities did well over the last 12 months, TSX banks went down but less than tech stocks did. Because of its concentration in “value” sectors, the TSX slightly outperformed the U.S. markets over the last 12 months.
Why do I recommend XIU as the one fund to get exposure to the Canadian markets, when there are so many others to choose from?
For one thing, the management fee is pretty low. At 0.16%, it won’t eat into your returns too much.
For another thing, it’s the most popular and frequently traded Canadian index fund, which means that trades are likely to execute at a price that’s good for you.
Third and finally, it’s operated by Blackrock, a U.S. investment manager that is well known for being stable and reliable. Over the years, Blackrock funds have performed satisfactorily for the company’s investors, and I expect XIU to do so for Canadians and anybody else investing in this country’s stocks.
Next up we have Vanguard All-World Ex-US ETF (NYSEMKT:VEU). This is a fund that includes most of the world’s big stocks, minus those listed in the United States. Why would I mention a fund that specifically excludes U.S. stocks? It comes down to two things:
- Many Canadian investors already have significant U.S. exposure, whether through individual stock holdings or via index funds like the Vanguard S&P 500 Index Fund.
- International markets are outperforming the U.S. this year.
Earlier, you’ll recall I wrote that Canadian stocks outperformed U.S. stocks over the last 12 months. That’s true. However, since the market bottomed in November, international stocks have performed better than both Canadian and U.S. stocks. There’s no big mystery behind why this happened: European and Asian stocks were just a lot cheaper than U.S. stocks in 2021. As often happens, the undervalued assets made gains compared to the expensive ones. Today, global stocks are still cheaper than U.S. stocks, so the opportunity may still be there.