Bear Market Rally Or Nascent Bull: What Should Investors Do Now?

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As of yesterday, the S&P 500 had recovered about 250 basis points from its 20+% price loss at the end of June. Recent signs have also indicated shifts away from ETFs in the Energy Sector and dominated by deep value. However, the old leadership is still showing signs of weakness and the new leadership seems yet to be determined. Strategists are split, some sensing that a nascent bull is in development while most others think that with more inflation, an impending recession, and global unrest, this is nothing more than a bear market rally destined to be short-lived. 

I see several reasons to be optimistic for the next six-to-twelve months;

a. In my opinion, the underlying supply chain and labor fundamentals simply don't support the type of recession that cripples an economy;

b. Market expectations eventually catch up with inflation rate shocks and historically, the market can do quite well during inflationary times as long as the inflation rates are in line with expectations. 

c.Likewise Fed tightening shocks are now being absorbed. Even better, the Fed has been very straightforward about what they will do and what signals they will look for to ease off what they are doing now.

Alternatively, I see reasons why it make take longer than we've gotten used to lately for the bear to end:

a. The inverted yield curve continues to rise on the short-end as short-term risk-free rates are on the rise. One of the key factors during the market's decade-plus-long rise was that risk-free rates were close to zero. If they rise to double the dividend yield of the S&P 500 ETFs, that factor goes out the window.  

b. Although eventually, consumer and supply chain fund fundamentals will improve corporate earnings beyong expectations, that will take a while. I consider it far more likely that disappointments in guidance and subsequent earnings reports will disappoint in the 3rd calendar quarter even more than they disappointed in the second quarter setting up an eventual year-end recovery. The strong dollar policy of the Fed will also hurt the earnings of companies that are net exporters.

c. I believe that the drumbeats of global unrest and potential war will grow louder with time. The market hates this type of uncertainty especially if we become more directly affected than we are today. Eventually, if uncertainty about potential war becomes war, then the market will rally strongly. That could take years as it did 2001 - 2003.  

Let's look where we are right now to discuss intelligently where we are likely to be going now, The list of best-performing equity ETFs in the US thus far this year has been dominated by two categories:
1. Leveraged/Inverse – almost always the case by definition; 

2. Single industry/sector – including energy, utilities, defense, insurance et al.

In my opinion, leveraged and inverse ETFs are short-term trading tools that are very rarely, if at all, suitable for most investors.

For the most part, sector and industry ETFs are cyclical timing tools. Sectors and industry group tend to fall in and out of favor during different market and economic cycles. It is difficult for most investors to time when to get into and out of a particular sector or industry group, but savvy investors will try and sometimes succeed. 

The two exceptions to this rule are utilities and consumer staples. Those two sectors have two important characteristics that VOO and other S&P 500 ETFs do not, Therefore, for income-oriented investors, especially those with a less-than-10-year time horizon in which they need to access capital, those funds in those two sectors (e.g., VPU, Vanguard Utilities ETF, and FSTA can be good compliments within a core that also contains growth-oriented ETFs such as VOO.  Alternative  

The overall point is that unless the primary goal is income generation, most sector ETFs, such as the Energy, defense, and commodities-based ETFs that exploded in the first half of 2022, are generally tactical rather than strategic holdings. Volatility and cyclicality render these products unsuitable as all-weather holdings for most long-term investors.

Many clients of financial advisors and direct investors are more comfortable with ETFs that they can hold in most markets without needing to anticipate cycle changes. That doesn’t mean necessarily that the only ETFs they should hold are S&P 500 ETFs.For income-oriented invested and those needing to draw capital without a significant risk of drawdowns, ETFs that emphasize low volatility, value, and high dividends can be an appropriate addition or substitute for core index and alpha-seeking ETFs.

Of the 677 equity funds that fit one of Morningstar’s nine categories, only 33 delivered positive returns for the past one-year period, the top 20 were all large- or mid-cap value funds. The top four of these were also low-volatility and high dividend funds. Those four funds were the only funds to somehow manage to deliver positive returns year-to-date as compared with -19% for S&P 500 ETF VOO.

In order of one-year return, these include:

FDL – First Trust Morningstar Dividend Leaders ETF (10%);

DHSWisdom Tree US High Dividend ETF (9%);

HDViShares Core High Dividend ETF, (7%); and

GBDVGlobal Beta Smart Income ETF (7%).

The Best Mutual Funds for Stable Returns

Figure 1 Income Stability Over Principal Growth

All six benchmark index ETFs are down substantially as shown here. For reference, the last two columns compare the data for VOO as of July 1, 2022, with VOO as of December 31, 2021. The differences are striking.








ETF Name

First Trust Morningstar Dividend Leaders ETF

Wisdom Tree US High Dividend ETF

iShares Core High Dividend ETF

Global Beta Smart Income ETF

Vanguard S&P 500 ETF

iShares Core US Aggregate Bond  ETF

ValuEngine Rating







Assets Under Mgmt. -AUM

$ 3 Billion

$1.2 Billion

$13 Billion

$6.7 Million

$247 Billion

$ 82 Billion

Historic YTD. Total Return







Historic 1-Yr. Total Return







Historic 3-Yr Ann. Total Return







Historic 5-Yr Ann. Total Return







Historic 10-Yr Ann. Total Return







VE Forecast 1-yr. Price Return














Sharpe Ratio (5-Year)














# of Stocks







Undervalued by VE %*







P/B Ratio







P/E Ratio







Div. Yield







Expense Ratio









Dividend Weighting

Dividend Weighted

Dividend Weighting

Revenue Weighting

Mkt. Cap Weighting

Dollar Weighted by Issuance

ETF Sponsor

First Trust

Wisdom Tree

iShares by Blackrock

Global Beta


iShares by Blackrock


  1. As expected, VOO had the highest total returns for the three-, five- and ten-year periods while suffering huge underperformance next to the four top-performing ETFs, all oriented towards low volatility, high current income, and attractive value ratios. The data reinforce the thesis that long-term investors not needing current income or to withdraw money from the account should stick to a growth-centric core as represented by the S&P 500.
  2. For the ten-year period ending July 15, 2022, the first 9.5 of which were as strong as the S&P 500 has ever enjoyed, the trade-offs in total return in exchange for lower drawdowns, lower Betas, and higher dividend yields seem very reasonable. This is particularly true for FDL, First Trust Morningstar Dividend Leaders ETF and HDV, iShares Core High Dividend ETF. 10.5% annual return. For those needing access to principal and current income, receiving double the dividend yield and still getting 10%+ annual growth while averting drawdowns is more than adequate compensation for an additional 3% per year total asset growth.
  1. On traditional value ratios, all four value ETFs are less expensive than the S&P 500 with FDL providing the best ratio values and dividend yield while HDV has the lowest volatility. Another way we look at attractiveness from a value perspective is by the percentage of portfolio holdings rated as undervalued by our models. FDL fares best here with 760% of its stocks are considered undervalued.FDL also a buy signal from Value Engine’s predictive models for year-ahead performance with a 4 rating.
  1. On a cost basis, HDV by iShares is the clear winner, Its 8 basis points (0.08%) expense ratio is just 5 basis points higher than VOO’s 3 basis points while FDL has the highest expense ratio at a whopping 35 basis points.
  1. The AGG is included to provide another somewhat surprising comparison. Traditional asset allocations include an allocation to bonds to minimize drawdowns and provide income. For this specific period, FDL and its peers did a much better job of both than AGG. Of course, hindsight is 20-20 and these potentially anomalous characteristics may not hold true in most periods going forward. Nonetheless, as shown, the trade-offs for investors in this category is worth subordinating attempts at core-relative alpha.


This bear market has provided an unusual skew of outperformance for ETFs combining tilts toward income low volatility and value characteristics. In bull markets or even average return markets, this is unlikely to be the case, but the goals of low volatility and higher-than-average income should continue to be reached. 

July has begun with the seedlings of a rally. Time will tell whether it’s a bear market rally or the start of a new bullish period. Investors and their advisors might wish to prioritize the goals of the account over predicting whether or not this is the beginning of the end for the bear.FDL and HDV are worthwhile investigating for the clients described above. Investors with the same objectives but more comfortable with active management oversight and nimbleness might also take a look at DIVZ, TrueShares Low Volatility Equity Income ETF managed by Austin Graff of Titleist Asset Management. It is the top performing active fund in this category with more than $50 Million under management. 

Accounts with longer time horizons and growth as the prime objective should stick to traditional core growth holdings such as VOO or VTI, Vanguard Total US Market Equity ETF. Competitively active alternatives for 5-year and recent performance include SYLD, Cambria Shareholder Yield ETF managed by the famed Meb Faber, and PSET, Principal Quality ETF. Even though the latter is rated to underperform during the next 12 months with a 2 rating by ValuEngine’s models, the combination of its team’s excellent track record and strong underlying fundamental characteristics make PSET worthy of checking out as a potential holding. As always, due diligence and staying true to client objectives are the keys to success. 

More By This Author:

Benchmark Review Following A Hell Of A First Half - What To Look For Going Forward
Investor Anxiety As Bear Market May Give Way To Recession
Values-Driven ETFs For American Conservatives

Disclaimer: Always read the fact sheets and/or summary prospectus before buying any ETF.  Do your own research. Past performance may not be indicative of future results.

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