The C Fund has outpaced the I Fund in recent years - by a lot - and has become very expensive, potentially giving the I Fund the advantage in years ahead.

Lyn Alden

The S&P 500, which represents the 500 largest public stocks in the United States and is tracked by the C Fund, is testing the local high point that it reached on June 8, after having spent the last several weeks in a correction:


It has a few positive technical signals now, such as a golden cross in place (the blue 50-day simple moving average going above the orange 200-day simple moving average), and the daily RSI indicator not in overbought territory like it was in June.

However, the put/call ratio is at historically low levels, suggesting that option traders are quite bullish and complacent at the moment. Historically that tends to be a contrarian sign, with a correction likely to occur.

C Fund vs I Fund

The I Fund follows the MSCI EAFE index, which was founded just over 50 years ago as one of the oldest global equity indices.

This chart doesn’t show dividends reinvested, but it shows how the S&P 500 (tracked by the C Fund) and MSCI EAFE (tracked by the I Fund) have raced each other over time, with each index taking the lead in various decades.

In the 1980’s, Japan had a huge economic growth rate and bubbly stock market, and the EAFE index substantially outpaced the S&P 500. However, after that bubble began to pop in 1990, the S&P 500 caught up over the subsequent decade, especially when it reached its own bubbly peak in 2000.


From there, the EAFE index pulled back ahead in the 2000’s decade, but became overvalued relative to the S&P 500. This past decade, the 2010’s was extremely favorable for the S&P 500, with a huge period of outperformance. However, by many valuation metrics, U.S. stocks are much more expensive than their international peers.

For example, the S&P 500 now has an average price/earnings ratio of over 21x, and price/book ratio of 3.4x. Meanwhile, the EAFE index has an average price/earnings ratio of 16x, a price/book ratio below 1.6x, and a higher dividend yield. Some of this is due to sector differences (more technology exposure in the S&P 500), but even adjusting for sector differences, the S&P 500 is simply more expensive. The dollar’s strength relative to other major currencies is also near the top of its long-term trading range.

If we zoom in on just the past five years (and this chart includes dividends), the difference in returns was remarkable, with a more than 4x higher cumulative rate of return from the S&P 500:

My first article here on FEDweek, written in late 2016, was an explanation of my bearish view for the I Fund. It indeed underperformed significantly compared to the C Fund since then.


However, over the past 1-2 years, with this performance gap and valuation gap having become so wide, I’ve become a bit more optimistic about the I Fund in relative terms over, say, the next 5 years.

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Lyn Alden is a financial writer and an engineer, and holds a bachelor’s in engineering and a master’s in engineering management, with a focus on financial modeling and resource management. She specializes in analyzing and presenting financial data. Her investment work can be found on LynAlden.com.

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