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5 Low-Risk Mutual Funds to Buy on Tax Cut Uncertainty
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Concerns over timing and implementation of President Donald Trump’s tax cut plans weighed on the key U.S. indexes recently. Investors remain pensive after Senate Republicans revealed a tax cut plan that entails the deferment of corporate tax cuts for a year. Adding to markets’ woes is a near certain rate hike post Fed’s December meeting.
Investors need to digest the uncertainties over implementation of Republicans’ tax cut plans and December rate hike prospects over the coming months. In this context, mutual funds that are capable of offering favorable returns and bear a lower level of risk might be prudent investment options.
Tax Cut Prospects Worries Investors
On Nov 9, Senate Republicans unveiled their version of a tax cut legislation which focuses on reducing the corporate tax rate from 35% to 20%, but not before 2019. In contrast, House Republicans’ version highlighted a similar tax cut by 2018. But, with the release of Senate Republicans’ tax plan, investors fretted over President Trump’s ability to implement his much-awaited tax reforms over the coming months.
With this new spell of uncertainty, all the three key U.S. indexes registered their first weekly declines in the last two months, in the week ended Nov 9. Also, benchmarks finished in the red on Nov 15, with both the Dow and S&P 500 registered their worst one-day performance since Sept 5.
December Rate Hike Evident
As expected, the Federal Reserve kept interest rates unchanged in its previous policy meeting ended Nov 1. But the Fed remained upbeat on domestic economic progress and a stronger labor market, offering signs of a December rate hike. In its next meeting from Dec 12-13, the Fed is widely expected to increase key interest rates by 0.25 points.As per CME Group's FedWatch tool, market expectations for a December rate hike are now 90%.
A wide section of investors is already bracing for a rate hike next month. But given the renewed uncertainty in the market over Trump’s tax overhaul policies, a rate hike could make things tougher. The Fed is only likely to tighten monetary conditions further going ahead, which makes it imperative for investors to focus on low-risk mutual funds.
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 why 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 returns one can derive from a portfolio by taking on additional risk.
This means that the higher the Sharpe ratio, the more attractive the fund will be among risk-averse investors. Now, most investors believe that mutual funds with a Sharpe ratio higher than 1 are lucrative. (Read: 4 Top-Ranked Mutual Funds with a Good Sharpe Ratio)
5 Best Low-Risk Funds on Focus
We have selected five mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) and have 3-year Sharpe ratio greater than 1. Moreover, these funds have impressive year-to-date (YTD) 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.
Colorado BondShares A Tax-Exempt (HICOX - Free Report) seeks growth of income, which is free from both federal and Colorado state income taxes. HICOX invests the lion’s share of its assets in tax-exempted debt securities including bonds and notes. The fund also seeks preservation and appreciation of capital.
The fund has YTD returns of 5.7%, and an expense ratio of 0.55% as compared with the category average of 0.88%. HICOX has a Sharpe ratio of 2.65, higher than category average of 0.01.
PIMCO Income Fund D invests more than 65% of its assets in a multi-sector portfolio, which includes fixed-income instruments like forwards or derivatives. PONDX may also invest around half of its assets in high-yield securities that are rated below investment grade but rated Caa by Moody's, or equivalently rated by Fitch or the S&P.
The fund has YTD returns of 7.6%, and an expense ratio of 0.79% as compared with the category average of 0.99%. PONDX has a Sharpe ratio of 2.18, higher than category average of 0.01.
Thrivent Limited Maturity Bond Fund Class S (THLIX - Free Report) invests a bulk of its assets in debt securities or preferred stocks that are "Baa" rated by Moody’s or "BBB" by the S&P. THLIX seeks growth of income along with stability of principal. The fund seeks stability of principal as well as growth of income.
The fund has YTD returns of 2.2%, and an expense ratio of 0.41% as compared with the category average of 0.75%. THLIX has a Sharpe ratio of 1.75, higher than category average of 0.01.
Nuveen Preferred Securities A (NPSAX - Free Report) invests a major portion of its assets in preferred securities. NPSAX seeks a high level of current income. The advisor invests a minimum 25% of its assets in preferred securities of companies primarily involved in financial services. The fund invests more than half of its assets in securities rated investment grade.
The fund has YTD returns of 9.8%, and an expense ratio of 1.07% as compared with the category average of 1.20%. NPSAX has a Sharpe ratio of 1.84, higher than category average of 0.01.
Columbia Global Technology Growth Fund A (CTCAX - Free Report) invests the lion’s share of its assets in common stocks, preferred stocks and securities that are convertible into common or preferred stocks. These equity securities are issued by technology companies that benefit from digital advancements or improvements. CTCAX seeks growth of capital.
The fund has YTD returns of 43.7%, and an expense ratio of 1.32% as compared with the category average of 1.42%. CTCAX has a Sharpe ratio of 1.50, higher than category average of 0.01.
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5 Low-Risk Mutual Funds to Buy on Tax Cut Uncertainty
Concerns over timing and implementation of President Donald Trump’s tax cut plans weighed on the key U.S. indexes recently. Investors remain pensive after Senate Republicans revealed a tax cut plan that entails the deferment of corporate tax cuts for a year. Adding to markets’ woes is a near certain rate hike post Fed’s December meeting.
Investors need to digest the uncertainties over implementation of Republicans’ tax cut plans and December rate hike prospects over the coming months. In this context, mutual funds that are capable of offering favorable returns and bear a lower level of risk might be prudent investment options.
Tax Cut Prospects Worries Investors
On Nov 9, Senate Republicans unveiled their version of a tax cut legislation which focuses on reducing the corporate tax rate from 35% to 20%, but not before 2019. In contrast, House Republicans’ version highlighted a similar tax cut by 2018. But, with the release of Senate Republicans’ tax plan, investors fretted over President Trump’s ability to implement his much-awaited tax reforms over the coming months.
With this new spell of uncertainty, all the three key U.S. indexes registered their first weekly declines in the last two months, in the week ended Nov 9. Also, benchmarks finished in the red on Nov 15, with both the Dow and S&P 500 registered their worst one-day performance since Sept 5.
December Rate Hike Evident
As expected, the Federal Reserve kept interest rates unchanged in its previous policy meeting ended Nov 1. But the Fed remained upbeat on domestic economic progress and a stronger labor market, offering signs of a December rate hike. In its next meeting from Dec 12-13, the Fed is widely expected to increase key interest rates by 0.25 points.As per CME Group's FedWatch tool, market expectations for a December rate hike are now 90%.
A wide section of investors is already bracing for a rate hike next month. But given the renewed uncertainty in the market over Trump’s tax overhaul policies, a rate hike could make things tougher. The Fed is only likely to tighten monetary conditions further going ahead, which makes it imperative for investors to focus on low-risk mutual funds.
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 why 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 returns one can derive from a portfolio by taking on additional risk.
This means that the higher the Sharpe ratio, the more attractive the fund will be among risk-averse investors. Now, most investors believe that mutual funds with a Sharpe ratio higher than 1 are lucrative. (Read: 4 Top-Ranked Mutual Funds with a Good Sharpe Ratio)
5 Best Low-Risk Funds on Focus
We have selected five mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) and have 3-year Sharpe ratio greater than 1. Moreover, these funds have impressive year-to-date (YTD) 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.
Colorado BondShares A Tax-Exempt (HICOX - Free Report) seeks growth of income, which is free from both federal and Colorado state income taxes. HICOX invests the lion’s share of its assets in tax-exempted debt securities including bonds and notes. The fund also seeks preservation and appreciation of capital.
The fund has YTD returns of 5.7%, and an expense ratio of 0.55% as compared with the category average of 0.88%. HICOX has a Sharpe ratio of 2.65, higher than category average of 0.01.
PIMCO Income Fund D invests more than 65% of its assets in a multi-sector portfolio, which includes fixed-income instruments like forwards or derivatives. PONDX may also invest around half of its assets in high-yield securities that are rated below investment grade but rated Caa by Moody's, or equivalently rated by Fitch or the S&P.
The fund has YTD returns of 7.6%, and an expense ratio of 0.79% as compared with the category average of 0.99%. PONDX has a Sharpe ratio of 2.18, higher than category average of 0.01.
Thrivent Limited Maturity Bond Fund Class S (THLIX - Free Report) invests a bulk of its assets in debt securities or preferred stocks that are "Baa" rated by Moody’s or "BBB" by the S&P. THLIX seeks growth of income along with stability of principal. The fund seeks stability of principal as well as growth of income.
The fund has YTD returns of 2.2%, and an expense ratio of 0.41% as compared with the category average of 0.75%. THLIX has a Sharpe ratio of 1.75, higher than category average of 0.01.
Nuveen Preferred Securities A (NPSAX - Free Report) invests a major portion of its assets in preferred securities. NPSAX seeks a high level of current income. The advisor invests a minimum 25% of its assets in preferred securities of companies primarily involved in financial services. The fund invests more than half of its assets in securities rated investment grade.
The fund has YTD returns of 9.8%, and an expense ratio of 1.07% as compared with the category average of 1.20%. NPSAX has a Sharpe ratio of 1.84, higher than category average of 0.01.
Columbia Global Technology Growth Fund A (CTCAX - Free Report) invests the lion’s share of its assets in common stocks, preferred stocks and securities that are convertible into common or preferred stocks. These equity securities are issued by technology companies that benefit from digital advancements or improvements. CTCAX seeks growth of capital.
The fund has YTD returns of 43.7%, and an expense ratio of 1.32% as compared with the category average of 1.42%. CTCAX has a Sharpe ratio of 1.50, higher than category average of 0.01.
Want key mutual fund info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>