The US government shut down after Congress was unable to reach a funding agreement. This is the 11th shutdown since 1981. During these shutdowns, many nonessential functions of the government cease. In most cases, the fiscal shortfall was resolved within a few days. However, four shutdowns lasted at least five days.
How did stocks fare during these prolonged episodes?
Index funds were a step in the right direction.
Investors were fed up with the high fees and poor performance from stock-picking active managers. Decades of evidence are now suggesting that very few actively managed funds consistently beat the market. That means a rules-based investment proposition with low expense ratios and broad diversification offers an appealing alternative. But, even with index-fund investing come limitations.
A rigid implementation process that prioritizes trackability over expected returns may be costing investors hundreds of millions of dollars each year—if not more. And arbitrary construction rules for security inclusion may result in notable deviations from the market. There is a better way for investors to get market returns with low cost, while not paying extra in the hidden costs of indexing.
Investors may wonder whether stock returns will suffer if inflation keeps rising. Here’s some good news: Inflation isn’t necessarily bad news for stocks.
A look at equity performance in the past three decades does not show any reliable connection between periods of high (or low) inflation and US stock returns.
Since 1993, one-year returns on US stocks have fluctuated widely. Stock returns can be strong, or weak, or in between when inflation is high. For example, returns were relatively strong in 2021 but poor in 2022. Twenty-two of the past 30 years saw positive returns even after adjusting for the impact of inflation.
Each year, Dimensional analyzes returns from a large sample of US-domiciled funds. This year’s study updates results through 2024 and includes returns from mutual funds and exchange-traded funds (ETFs) domiciled in the US. Our objective is to assess the performance of fund managers relative to benchmarks.
The evidence shows that a majority of fund managers in the sample failed to deliver benchmark-beating returns after costs.
We believe that the results of this research provide a strong case for relying on market prices when making investment decisions.
Investors seeking high yields in their stock allocations have been flocking to the category known as derivative income funds. This breed of products combines equity index exposure with options to generate income, producing higher-than-bond yields. Inthe first half of 2025 alone, 36 new derivative income funds were launched, and more than $30 billion in net flows were directed to the category.
Higher yields don’t always equate to higher returns. Over the past 10 years, the net return to the derivative income fund category was 7.12%, compared to 12.05% for large blend funds.
But some investors prefer their total return to be disproportionately composed of income. These investors should be aware that the income generated by options in derivative income funds is often treated as ordinary income for tax purposes, and that may drive up an investor’s tax bill.
This is apparent in the stark effect on returns that are preserved after taxes. Over the 10-year period ending June 30, 2025, only about 65% of returns survived taxes for the derivative income fund category, compared to 85% for large blend funds.
US government debt as a percentage of GDP (gross domestic product) reached 121% at the end of 2024. Many investors may have concerns about the impact of this level of debt on the stock market. While government spending associated with debt may provide a stimulatory effect on the economy, the prospect of higher future taxes and long-run impacts on spending and investment introduces many channels through which spending and debt levels might affect expected stock returns. But what investors may not realize is that the historical data show little relation between debt levels and stock returns. There are numerous examples of countries carrying high debt for extended periods while their stock markets posted double-digit annualized returns. One explanation is that stock markets set prices to the point where investors have a positive expected return given current information. Since country debt is a slow-moving variable, it’s sensible that current prices reflect expectations about the effect of government debt. Plus, economic theory does not offer a debt threshold beyond which a country is in economic peril. Dimensional’s Mark Gochnour, Wes Crill, and Jake DeKinder explore the implications of the rising US federal debt and discuss how investors should respond.
