How the Largest US Stock Funds Did in Q3

The largest value stock mutual funds and exchange-traded funds got their chance to shine in the third quarter as tech-heavy growth strategies lagged.

“The large growth space has led the market since its late-2022 bottom, but during the third quarter of 2024, small- and mid-cap funds, along with blend and value funds, have fared better through Sept. 23,” says Morningstar manager research analyst Andrew Redden. “This shift comes as some household large-cap growth names, such as Microsoft MSFT, Nvidia NVDA, and Alphabet GOOGL/GOOG, have cooled off a bit.”

The biggest index funds produced middling results after significantly outperforming their categories during the second quarter. Small and mid caps, which have lagged large caps for years, rallied during the quarter.

While the big winners changed, stocks remained in bull market mode, as the Federal Reserve closed the quarter by making its first interest rate cuts of the current cycle. The US stock market rose 5.7% in the quarter as measured by the Morningstar US Market Index, while the Morningstar US Large Cap Index returned 5.1%, compared with 8.5% for the Morningstar US Small Cap Index. The Morningstar US Growth Index returned 4.6%, lagging the Morningstar US Value Index’s 9.0%.

Here’s a look at how the largest active US stock funds—both actively and passively managed—performed in the third quarter. Performance data for this article was based on the lowest-cost share class for each fund. Some funds may be listed with share classes not accessible to individual investors outside retirement plans. The individual investor versions of those funds may carry higher fees, reducing returns to shareholders. For longer-term returns, if a share class was launched more recently than the period mentioned, an older share class was substituted if one exists.

Q3 Performance for the Largest Actively Managed US Stock Funds

Out of the top 10 largest active US stock funds, the $105 billion American Funds American Mutual Fund RMFGX had the highest total return in the quarter, at 9.5%. The fund, which sits in the large-cap value category, has a Gold Medalist Rating from Morningstar. However, the fund with the highest ranking in its category out of the 10 was the $292 billion American Funds Growth Fund of America RGAGX, which ranked in the 21st percentile in the large growth category with a 5.3% return.

Reflecting the third-quarter trend of value funds outperforming, American Funds Growth fund lagged American Mutual fund by more than 4 percentage points. Value’s outperformance was large enough that the growth fund underperformed despite ranking higher in its category.

“For the third quarter, it seems value and small/mid caps have been driving results,” says Morningstar senior manager research analyst Stephen Welch. “Given this, it’s not surprising that Washington Mutual is in the top quartile, as it leans more toward quality value. It’s underweighting in tech and picks in healthcare and industrials have helped.”

Q3 Performance for the Largest US Index Stock Funds

The 10 largest index funds performed squarely in the middle of their categories. While in the second quarter, seven of the largest index funds were in the top 25% of their categories, in the third quarter, only one did so: the $183 billion Vanguard Value ETF VTV. It’s also the only value fund in the top 10, and it returned 9.4% for the quarter—the most out of the 10 in absolute terms.

In the top 10, the worst performer (both in terms of absolute returns and category ranking) was the $294 billion Invesco QQQ Trust QQQ, which returned 2.1% for the quarter. It landed in the 76th percentile in the large growth category. This was far from the 8% return and 21st percentile ranking it clocked in the second quarter.

“You can trace most of Invesco QQQ Trust’s trouble in the third quarter to its sector composition,” explains Morningstar analyst Ryan Jackson. “Its heavier-than-average technology allocation has been a tailwind for quite some time, but it hurt the Qs when large tech stocks hit a speed bump last quarter. The fund also excludes financials and real estate altogether. Those sectors represent a small piece of the average large-growth fund, but their strong returns last quarter provided a boost that the Qs didn’t catch.”

Largest Active US Stock Funds Long-Term Performance

The two funds that saw divergences between their five-year trailing performance and their third-quarter performance were the $115 billion Dodge and Cox Stock Fund DOXGX in the large value category and the $98 billion JPMorgan Large Cap Growth Fund JLGMX in large growth. Both funds ranked in the top 10 for their categories over the past five years but came in just above the 70th percentile in the third quarter.

Redden explains that JPMorgan Growth Fund manager Giri Devulapally’s “track record remains strong across most timeframes, and we are confident in his and his team’s ability. Although returns are middling ... as some smaller positions such as Celsius CELH have faltered, the team has a proven track record of finding outsized growth opportunities early on and trading them effectively. A brief period of middling returns or underperformance is not unusual or concerning given this context.”

As for the Dodge and Cox fund, both sector positioning and individual stock selection appear to have hurt it. “The fund didn’t have much exposure to some of the best-performing sectors in the quarter, including utilities, real estate, and consumer defensives,” says Tony Thomas, associate director of equity strategies for Morningstar.

“Sectors like real estate and utilities arguably fared better in part because the prospect of lower interest rates made those stocks’ usually juicy dividends look more attractive. Some longstanding positions, such as Occidental Petroleum and Charles Schwab, also languished,” he continues. “For what it’s worth, I don’t see any major missteps by the Dodge & Cox team last quarter. The strategy can struggle in any given short period, but its managers generally guide it to success over multiyear periods.”

Long-Term Performance for the Largest US Index Stock Funds

Invesco QQQ Trust has the largest gap between its quarterly returns (2.1%) and its five-year trailing returns (21.7%). Its longer-term ranking in its category is in the 3rd percentile, far from the 76th percentile rank it achieved in the third quarter. The fund’s very high technology allocation dragged on its performance, as that sector underperformed during the quarter after a long period of leading the market. “It’s not a technology fund by design, but it measures up best when tech leads the market,” says Jackson

The $171 billion Vanguard Mid Cap Index VMCPX fund returned 9.4%, making it the second-best performer among the group, with a third-quarter ranking in the 26th percentile in its category. Its five-year trailing return of 11.2% was the worst out of any of the 10 largest index funds.

“Fees are part of the story,” says Morningstar senior manager research analyst Daniel Sotiroff. “VMCPX charges 0.03% per year, while the average fund charges about 0.90%. So that accounts for about one-fourth of the performance gap.” He adds: “Poor stock selection by active managers in the category also appeared to play a role. Palantir Technologies PLTR, Carrier Global CARR, and DR Horton DHI were some of VMCPX’s largest holdings, and they turned in strong performances over the quarter. I suspect a fair number of active managers were underweight those names.”