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4 Defensive Funds to Buy Amid Market Gyration

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United States’ trade disputes with its key trade partners have induced volatility in financial markets, making it necessary for investors to seek safe havens. Apart from trade, the U.S. government preparing for investigating technology giants for possible violations of antitrust law also led to market volatility. Yield-curve inversion is another reason for erratic market conditions.

In such a scenario, one can opt for mutual fund investments in defensive areas to ensure minimal risk exposure in times of trade policy uncertainties.

Government to Launch Antitrust Probe against Tech Giants

Major technology company shares were slammed on Jun 3 after reports surfaced of them facing government probe. Amazon and Apple are reportedly facing a Department of Justice investigation on grounds of antitrust violation and Facebook could face an investigation by the Federal Trade Commission.

The Nasdaq Composite Index entered correction territory on Jun 3 with shares of Alphabet and Facebook falling 6.1% and 7.5%, respectively. Google’s business practices related to its search and other businesses will form the basis of its investigation while Facebook will face a probe on whether it has engaged in any anticompetitive practices illegally.

US-Mexico Spat to Make Imported Consumer Goods Pricier

President Donald Trump’s threat to impose 5% tariff on all imports from Mexico from Jun 10 has brought United States’ largest trading partner on the negotiation table this week.

United States’ proposed tariffs on Mexico could reach up to 25% by October and remain permanently in place until Mexico significantly reduces the number of illegal immigrants crossing into U.S. According to the Consensus Bureau, Mexico delivered $346.5 billion in goods to the United States in 2018. Therefore, the ripples created by U.S. tariffs could be felt across a wide range of industries that include auto, electronics and food.

According to Deutsche Bank, demand for U.S.-made cars could decline by 18% if the proposed tariffs are imposed. When it comes to electronics, a fifth of America’s computer and electronic equipment imports arrive from Mexico, Goldman Sachs cited. This amounts to $44 billion annually in electronics. Undoubtedly, the electronics sector is set to incur significant additional costs.

Lastly, 35% of all U.S. vegetable imports come from Mexico. A 25% tariff on $15 billion worth of vegetables imported from the southern neighbor could make eating greens rather costly.

China’s Retaliatory Moves to Affect U.S. Companies

The ongoing trade war with China only escalated in May after a brief truce in the first quarter. United States’ decision to blacklist Chinese telecom giant Huawei, which effectively refrains American companies to do business with the Chinese company, led to a retaliatory framework from the Asian country. First, China is creating its own list of “unreliable” foreign companies that hamper the legitimate interests of Chinese companies through their actions.

This could make global American technology giants such as Apple, Alphabet and Intel along with non-U.S. suppliers that cut off supplies to Huawei the prime targets for the list.

Second, China’s dominant position as a supplier of rare earths to the United States has also raised concern over the country clinching its supply. Rare earth elements form an essential part of smartphones, electric car motors, satellites, military jet and engines among others. If China restricts its supply of rare earths, American companies such as Apple, Raytheon, Lockheed Martin and BAE Systems could be affected.

Echoing investor concern over United States’ current trade disputes, Morgan Stanley said earlier this week that global economy could enter a recession in three quarters, CNBC cited. The investment bank said that reduced capital expenditures could curb global demand.

Yield-Curve Inversion Instils Fear

Investors remained tensed as returns on the benchmark 10-year Treasury yield fell even lower, making its inversion against the 3-month Treasury bill greater.

The yield curve basically measures the difference between the return on the longer duration Treasury and the shorter duration ones. It should ideally move upward since investors demand higher returns for longer periods of time.

A yield curve inversion, however, indicates that investors aren’t very confident about the long-term prospects of the economy and are therefore demanding higher yields on the short-term Treasury bills.

4 Mutual Funds to Buy

Given the gloomy scenario, opting for defensive mutual funds that largely invest in healthcare and utility companies are ideal for one’s portfolio. Why? Because defensive companies offer the kind of services that are in demand irrespective of the economic scenario.

We have, thus, selected four mutual funds from these areas that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is less than $5000.

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.

Now we come to the second-most vital question: 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

Fidelity Select Pharmaceuticals Portfolio (FPHAX - Free Report) aims for capital growth. The fund invests the majority of its assets incompanies that research, develop, manufacture, market or distribute pharmaceuticals and drugs of all types. The non-diversified fund invests in U.S. and non-U.S. companies alike. The fund mostly invests in common stocks.

This Zacks 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.

FPHAX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.80%, which is below the category average of 1.22%. It has three and five-year returns of 4.8% and 5% respectively.The minimum initial investment for the fund is $2500.

Invesco Health Care Y (GGHYX - Free Report) aims for long-term capital appreciation. The fund invests most of its net assets in securities of companies primarily engaged in health care-related industries. It may invest across all market capitalizations, and a significant amount of its assets in the securities of small- and mid-capitalization companies. The fund invests in equity securities, securities convertible into equity securities and depositary receipts.

This Zacks 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.

GGHYX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.85%, which is below the category average of 1.22%. It has three and five-year returns of 7.4% and 6.3% respectively.The minimum initial investment for the fund is $1000.

Utilities

Fidelity Telecom and Utilities (FIUIX - Free Report) aims for high total return by combining current income and capital appreciation. The fund invests the majority of its assets in securities of telecommunications services and utility companies. The non-diversified fund invests in U.S. and non-U.S. companies alike. The fund considers financial condition and industry position of a company along with market and economic conditions before selecting its investments.

This Zacks 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.

FIUIX carries a Zacks Mutual Fund Rank #1 and has an annual expense ratio of 0.70%, which is below the category average of 1.07%. It has three and five-year returns of 9.9% and 8.2% respectively.The fund has no minimum initial investment.

American Century Utilities Investor Class (BULIX - Free Report) aims for current income and growth of capital and income over a long period of time. The fund primarily invests in equity securities of companies engaged in the utilities industry. Its portfolio is created keeping in mind quantitative and qualitative management techniques along risk control factors.

This Zacks 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.

BULIX carries a Zacks Mutual Fund Rank #2 and has an annual expense ratio of 0.67%, which is below the category average of 1.07%. It has three and five-year returns of 6.5% and 7.1% respectively.The minimum initial investment for the fund is $2500.

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