4 Defensive Funds to Counter Market Uncertainties – February 13, 2019

U.S. stock market performance has failed to maintain January’s momentum in February as markets have grown sceptical over the recent round of U.S.-China trade talks and possibility of another partial government shutdown. Given the gloomy scenario, it would be prudent to invest in defensive funds for decent gains.  

Trade Deal by Mar 1 Deadline is Unlikely

The mixed performance by market indexes from last week indicates investors’ uncertainty over any definitive end to the ongoing U.S.-China trade dispute. Investor hopes are set high on the ongoing trade talks this week before the Mar 1 deadline, wherein the United States might increase its 10% tariff to 25% on $200 billion worth of Chinese goods in a no-deal scenario.

Per a South China Morning Post report, David Malpass, a U.S. trade delegation member, said on Feb 12 that the Mar 1 deadline would not be extended. In order to address United States’ concerns over intellectual property protection, forced technology transfers and Chinese market access by American companies, China needs to implement structural reforms to its policies.

A complex structural policy reform on China’s part is highly unlikely by Mar 1, and thus could end up in a deal that could postpone new tariffs, but may not remove the proposition of a complete abolition of tariff hikes by the United States. Thus, a favorable solution to the trade talks is unlikely by Mar 1, which indicates market uncertainties might persist longer.

Border Talks Stall

Democratic and Republican lawmakers had argued over the immigrant detention policy last week, as the former wanted to limit the number of beds from 40,520 to 35,520in detention facilities. They believed it would shift the focus from capturing law-abiding immigrants to arresting criminals. However, Republicans had rejected the option citing that President Donald Trump wouldn’t sign any legislation to reduce the number of beds. The disagreement stalled border talks.

However, on Feb 11, the Congress finally gave its nod to a partial funding of $1.4 billion against Trump’s demand of $5.7 billion for the wall along Mexican border. Trump expressed dissatisfaction over congressional negotiators’ agreed deal on border security the following day, saying he didn’t wish to see another government shutdown.

He didn’t mention whether he would be signing the legislation though.

4Mutual Funds to Buy

In a scenario such as this where uncertainty looms large, defensive funds might be your best bet for stable earnings. These funds invest in defensive stocks, companies that pay constant dividends and have steady earnings, in order to make the most regardless of stock market performance.

Defensive stocks are always in demand because of the products and services they offer. This brings under the umbrella utilities and healthcare sectors, which are always in demand irrespective of market conditions or various phases of the company’s business cycle.

We have selected four defensive mutual funds you could consider adding to your portfolio. These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5,000.

We expect these funds to outperform peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Healthcare

Vanguard Health Care Index Admiral (VHCIX Free Report) seeks to gain capital by following the performance of a benchmark index. The fund applies an indexing investment approach that tracks the performance of the MSCI US Investable Market Index (IMI)/Health Care 25/50. This index comprises equity securities of large-cap, mid-cap and small-cap companies engaged in the health care sector. This non-diversified fund attempts to invest in the equities in a manner that allows it to hold each stock in the same proportion as its weighting in the index.

This Sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VHCIXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.10%, which is below the category average of 1.28%. The fund has three and five-year returns of 13.66% and 11.97%, respectively.

Schwab Health Care (SWHFX Free Report) aims for capital growth by primarily investing in equity securities of companies in the healthcare sector. The fund invests up to 80% of its net assets in pharmaceutical and biotechnology companies, medical product and equipment manufacturers and suppliers and health care facilities operations etc.

This Sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

SWHFXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.80%, which is below the category average of 1.28%. The fund has three and five-year returns of 11.06% and 10.35%, respectively.

Utilities

Vanguard Utilities Index Adm (VUIAX Free Report) seeks capital appreciation by following the performance of a benchmark index. The fund applies an indexing investment approach that tracks the performance of MSCI US Investable Market Index (IMI)/Utilities 25/50. This index comprises equity securities of large-cap, mid-cap and small-cap companies engaged in the utilities sector. VUIAX attempts to invest in the equities in a manner that allows it to hold each stock in the same proportion as its weighting in the index. The fund is non-diversified.

This Sector – Utilities product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VUIAXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.10%, which is below the category average of 1.17%. The fund has three and five-year returns of 11.00% and 10.99%, respectively.

Fidelity Telecom and Utilities (FIUIX Free Report) seeks to gain capital and current income by investing a majority of its net assets in common stocks. The fund mostly invests in telecommunication companies and utility companies. This non-diversified fund invests in both U.S. and non-U.S. companies.

This Sector – Utilities product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FIUIXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.54%, which is below the category average of 1.17%. The fund has three and five-year returns of 11.14% and 8.20%, respectively.

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