An Odd 2 Weeks
Last week, I discussed how the top appears to be in for stocks, and they did fall again this week, with bonds rallying again.
A Look at the Market
It was another rare week, with bonds doing better and stocks doing worse. The S&P 500 has returned 12.3% with dividends included, and the price is up 11.5% for SPDR S&P 500 ETF (SPY) in 2026 so far. This leaves the market on track to post a return for the full year right under 16%. At the same time, iShares Core US Aggregate Bond ETF (AGG) has declined in price in 2026. With dividends included, the return has been -1.0%, which is well below cash.
The action these past two weeks reminds me of how the year started. Early in the first quarter small stocks soared, and investors favored value stocks over growth stocks. The very largest stocks were under pressure. In Q1, the mega-caps were very weak
Over the past two weeks, small-caps, which were hammered recently, have outpaced larger ones. Looking at the action since 10/09 for the three different S&P indices, the smallest have increased while the largest have declined by more than the mid-caps:
Oddly, the Russell 1000 has done better than the Russell 2000, which is down only slightly less than the S&P 500:
Remember, though, the Russell 1000 includes mid-cap, and mid-caps are up. Still, the top of the Russell 1000 is very similar to the top of the S&P 500 in terms of size. The ten largest names in the S&P 500 are the exact same and total 37.8%, while these names total 35.1% of the Russell 1000. Those ten names have seen two gains over the past two weeks, with Eli Lilly (LLY) rising 8.0% and Apple (AAPL), now the largest stock, rising 3.3%. Two stocks, Broadcom (AVGO) and Meta Platforms (META). have declined double-digit. NVIDIA (NVDA), the former largest company, has dropped 8.0%. So, the action of the very largest names could play a small role in the outperformance of the Russell 1000 relative to the S&P 500, but it doesn't explain it all.
Looking at the action over the past ten weeks (since 8/14), Apple has gained the most of these ten stocks, rising 13.7%, while Broadcom, down 18.0%, has been the worst. Four others of the very largest stocks have declined as well, including the two Alphabets, NVIDIA and Amazon. Yet, large-caps have way outpaced smaller stocks since then:
The action over the past two weeks looks odd, as the action since mid-August looks more appropriate, with the Russell 1000 in line with the S&P 500. The large -caps have way outpaced the smaller stocks. The Russell 2000 has been very weak since mid-August, but a look at the year-to-date action looks more appropriate:
The S&P 600, which lead the way very early in the year but has been quite week recently, is on top for the year. The S&P 400, which has been strong over the past two weeks relatively, is in last place in 2026 and has weighed on the Russell 1000, which trails the S&P 500.
Size matters when it comes to stocks, but there are many other factors that can impact the returns of index, including composition by sector. I like smaller stocks in general relative to larger ones right now, and this is due to the very large Technology exposure of the S&P 500 and the high concentration in the very largest names that I discussed above. The three ETFs that I own are tied to the smaller part of the market. My two large holdings, REGL and SMDV, can be compared to the S&P 400 and the S&P 600. Here is the sector exposure breakdown:
These smaller ETFs are very different from the S&P 500 in terms of sector exposures, and they also differ greatly from the smaller indices. In each of the indices and the ETFs, sector sizes in excess of 10% are green. The S&P 500 has just two sectors of the eleven that are more than 10%, including the massive Technology sector as well as Financials. The S&P 400 and S&P 600 have five that are above 10%, including Technology and Financials but also Consumer Discretionary, HealthCare and Industrials.
Looking at these two ETFs that I include in the model portfolio, they are both not only dividend-payers, but higher in quality than the overall market. I compare for both of them the sector exposure to their respective similar market cap index as well as the S&P 500. The differences between their exposures and the index exposures point to higher by 5% or more in green and lower by 5% or more in red. Both REGL and SMDV are more than 5% underweight relative to HealthCare, Industrials and Technology, while SMDV is also more than 5% underweight in Consumer Discretionary. Both are overweight by more than 5% relative to the indexes in the same sectors: Financials, Materials and Utilities.
I want to end with a statement that I remain very confident in SMDV and REGL. Here is how they have performed relative to the S&P indices since the end of 2022:
Owning REGL and SMDV (as well as VBR) is very different from owning the S&P 500. I believe that it is higher quality as well as less concentrated, with much lower exposure to large-cap Technology. They have lagged for the past several years, but are not so bad in 2026 after this recent outperformance over the past two weeks. SMDV, which is now my second largest equity exposure, has returned 14.0%, which is ahead of the S&P 500 return. My largest equity ETF holding, REGL, has returned only 8.5% year-to-date:
ETF Model Portfolio Update
This ETF model portfolio, which is measured against 60% SPY and 40% AGG, is down slightly year-to-date relative to its benchmark. This week, I did a few trades that were published here instead of on my Seeking Alpha blog. For those who would like real-time alerts (free of charge for now), just subscribe to the blog.
I haven't written any ETF articles on this blog or on TalkMarkets recently, but I did share some at Medium:
Going into the week, my model portfolio equity exposure totaled 52.7%, spread out across three ETFs. Here is what I did this week:
Thursday: I reduced PIMCO 15+ Year TIPS ETF (LTPZ) again, and I also sold some ProShares S&P 600 Dividend Aristocrats ETF (SMDV).
Here is the current model portfolio, which now has 51.7% equity exposure in three ETFs and fixed income exposure in two TIPS ETFs that total 39.5%, with cash at 8.8%:
After starting strong, the model portfolio had a rough Q3, but it is now back on track. The S&P 500 posted an all-time high in early Octrober, but it looks like a double-top to me. The Russell 2000 posted an all-time high in mid-August but has pulled back more than 10% from that high, though it is bouncing now.. Being underweight stocks all year, my return relative to the 60/40 index is higher again after going negative in early October. It is currently about +3.5% in just over10 months. This was a solid week of almost 2% outperformance. As the S&P 500 fell and the Aggregate Bond Index bounced again, the model portfolio, which was up, outperformed the index as it rose in value.
The early year-to-date strong relative performance was not due to superior returns on the equity ETFs. My TIPS ETFs have done reasonably okay relative to AGG, at least until very recently, but they aren't exactly boosting the return. I have had positive returns from three ETFs, two of which I no longer hold and one of which was down a lot year-to-date but rallied while I held it, and there has been some good trading that has helped me with a bad overall asset allocation weighting.
How I Can Help You
I enjoy analyzing ETFs and stocks, and I like sharing my thinking in writing. I was considering starting a subscription service or joining one that is already being published. What things would you as an investor like to see offered?
If you are an investment professional, I would like to work with you as well. I can help educate financial consultants about the ETFs, and I can work with management at investment firms to help create model portfolios or potential ETF investments. Please let me know if your firm would be interested in this.
My ETF articles at Seeking Alpha, written under the alias The Intelligent ETF Investor, shared a lot of my ideas. I continue to share those ideas here on this blog.
Comments