Over the past few sessions, rising geopolitical concerns left a negative impact on investor sentiment. All the key U.S. indexes slumped in recent times after the U.S. dropped "the mother of all bombs" on a suspected terror hideout in Afghanistan. Moreover, the recent standoff between the U.S. and North Korea and uncertainty over the French election added to investor woes.
In this context, mutual funds that are capable of offering favorable returns and bear a lower level of risk might be prudent investment options. And to identify low-risk mutual funds, we have used Sharpe ratio which is used to measure a fund’s risk-adjusted returns.
MOAB Shakes Sentiments
The U.S. dropped the “Mother of All Bombs” or MOAB, also known as GBU-43/B Massive Ordnance Air Blast bomb in Afghanistan, with the intention to destroy a suspected ISIS tunnel network. In this context, President Trump said that it was a very proud moment and “was another very, very successful mission” for the U.S. military.
Additionally, tensions between Russia and the U.S. escalated after the latter allegedly accused the former of trying to cover up the ghastly Syrian chemical attack last week. The U.S. concluded that the Syrian military applied the banned sarin gas in the attack that had inflicted severe casualty on many civilians.
U.S. And North Korea Tension Persists
The U.S. has cautioned that it may initiate a preemptive strike against North Korea should the reclusive country conduct another nuclear test. This has naturally left investors wary. Further, in this context, the Vice Foreign Minister of North Korea, Han Song Ryol, said that the country will “go to war,” in case the U.S. opts “a preemptive strike.”
Last week, in his meeting with Chinese President Xi Jinping, U.S. President Donald Trump said that a trade deal with China will be far better only if the country works with the U.S. to address the North Korea issue. But he also said that the U.S. will respond to Pyongyang if China, one of North Korea’s partners, doesn’t act.
On the election front in France, euro sceptic candidate Jean-Luc Melenchon’s sudden entry raised uncertainty among voters. Melenchon succeeded in catching eye after he beat conservative candidate Francois Fillon to take the third place in some of the recent polls.
Moreover, Front National’s far-right candidate Le Pen already wants to shake-up the European Union and with Melenchon’s entry, fears of France’s exit from the euro zone or “Frexit” soared. As compared to Brexit, Frexit will spark more turmoil as France is considered an integral part of both the Eurozone and the European Union.
How to Identify Low-Risk Funds?
Before selecting funds, it is important to identify appropriate indicators that can effectively measure the risk level of a fund. This is the reason we have used Sharpe ratio to screen low risk mutual funds. Sharpe ratio generally measures a fund’s average return relative to the level of volatility experienced by the same. Further, Sharpe ratio indicates how much extra return one can derive from a portfolio by taking additional risk.
This means that the higher the Sharpe ratio, the more attractive the fund will be among risk-averse investors. Now, in terms of an ideal Sharpe ratio, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options.
4 Low Risk Mutual Funds on Focus
We have selected four mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) and have 3-year Sharpe ratio greater than 1. Moreover, these funds have impressive year-to-date (YTD) and three months returns. They also have minimum initial investment within $5000 and low expense ratios.
We expect these funds to outperform their 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.
PIMCO Income D (PONDX - Free Report) invests more than 65% of its assets in a multi-sector portfolio of fixed income securities. PONDX may also invest around half of its assets in high yield debt securities. This fund has 3-year Sharpe ratio of 2.09.
PONDX has YTD and 3-month returns of 3.1% and 2.6%, and an expense ratio of 0.79% as compared to the category average of 0.95%. The fund has a Zacks Mutual Fund Rank #1.
Fidelity Series Real Estate Income F (FSRWX - Free Report) invests heavily in common and preferred stocks of real estate investment trusts (REITs) and in companies with exposure to real estate and related industries. This fund has 3-year Sharpe ratio of 1.66.
FSRWX has YTD and 3-month returns of 3.7% and 2.7%, and an expense ratio of 0.61% as compared to the category average of 1.04%. The fund has a Zacks Mutual Fund Rank #1.
BlackRock Allocation Target Shares Series S (BRASX - Free Report) invests the majority of its assets in residential and commercial mortgage-backed securities of non-U.S. government organizations like the World Bank. BRASX may also invest in corporate bonds, asset-backed securities, cash equivalent investments, etc. This fund has 3-year Sharpe ratio of 2.14.
BRASX has YTD and 3-month returns of 1.1% and 0.9%, and an expense ratio of 0.00% as compared to the category average of 0.55%. The fund has a Zacks Mutual Fund Rank #1.
Principal Preferred Securities P invests a bulk of its assets in preferred securities. PPSPX invests more than one-fourth of its assets in securities of domestic and foreign financial services companies. This fund has 3-year Sharpe ratio of 1.80.
PPSPX has YTD and 3-month returns of 4.9% and 3.4%, and an expense ratio of 0.82% as compared to the category average of 1.33%. The fund has a Zacks Mutual Fund Rank #2.
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