The coronavirus pandemic has dealt a huge blow to the American economy, claiming more than 100,000 lives and rendering more than 40 million jobless. Many experts believe that the economy is at a risk of entering a recession. However, the bulls remain optimistic about a recovery much stronger than expected on the back of prudent decision making by the Federal Reserve and the U.S. government.
Meanwhile, some experts have termed such optimism a delusion. They believe that the market’s unexpected easing of losses is a correction or a bear market rally. A bear market rally is risky at this stage because it is usually followed by fresh lows that stock prices hit. In such uncertain times, capture ratios must be considered by mutual fund investors.
Upside/downside capture ratio guides an investor during phases of market upside and downside, respectively. These ratios help investors take informed decisions by showing them whether a fund has outperformed, i.e. gained more or lost less, the broader market.
In other words, these ratios indicate by how much a particular fund gained when the markets rallied and by how much it fell during stock market corrections.
The upside and downside capture ratios for stock funds are calculated in comparison to the S&P 500. Meanwhile, ratios for bond and international funds are calculated versus the Barclays Capital U.S. Aggregate Bond Index and MSCI EAFE Index, respectively.
What is Downside Capture Ratio?
The downside capture ratio is used primarily to analyze a fund’s performance in terms of returns during the bear market. In other words, this ratio tells us how less a particular fund lost during a bear market compared to the broader market.
A downside capture ratio of less than 100 indicates that a particular fund has lost less than its benchmark during the phase of dull returns. In contrast, an upside capture ratio of over 100 means that the fund has outperformed the benchmark during the period of positive returns. A fund having upside capture ratio of say 150 shows that it gained 50% more than its benchmark during the bull market.
Further, downside capture ratio is calculated by dividing fund returns by the benchmark returns during a down market period.
The formula for downside capture ratio is:
Downside Capture Ratio= (Fund returns during bear runs/Benchmark Returns)* 100.
3 Best Choices
We have, thus, selected three mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) that are poised to gain from such factors. Moreover, these funds have encouraging one and three-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a downside ratio which is less than 100. Furthermore, these funds have an upside capture ratio of above 100.
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.
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).
Fidelity Select Software & IT Services Portfolio (FSCSX - Free Report) fund invests the majority of its assets in companies whose primary operations are related to software or information-based services. It primarily focuses on acquiring common stocks of both domestic and foreign companies.
This Zacks sector - Tech 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.
FSCSXhas an annual expense ratio of 0.71%, which is below the category average of 1.29%. The fund has one and three-year returns of 31% and 23.2%, respectively. FSCSX has a downside capture ratio of 69 and an upside capture ratio of 144.
Fidelity Advisor Series Growth Opportunities Fund (FAOFX - Free Report) seeks growth of capital by investing primarily in common stocks. The fund invests in securities of only those companies which the Fidelity Management & Research Company (FMR) believes have above-average growth potential. FAOFX securities of both U.S. as well as non-U.S. based companies.
This Sector- Large Cap Growth 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.
FAOFXhas an annual expense ratio of 0.01%, which is below the category average of 1.05%. The fund has one and three-year returns of 32.9% and 28%, respectively. FAOFX has a downside capture ratio of 83 and an upside capture ratio of 144.
Janus Henderson Global Technology and Innovation Fund Class T (JAGTX - Free Report) fund invests a huge portion of its assets in equity securities of those companies that are expected to gain from improvements or advancements in technology. JAGTX seeks capital appreciation for the long run and invests in both domestic and foreign companies with stable growth potential. It generally invests in companies from different nations including the United States.
This Sector - Tech product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
JAGTX has an annual expense ratio of 0.93%, which is below the category average of 1.29%. The fund has one and three-year returns of 32.9% and 22.7%, respectively. JAGTX has a downside capture ratio of 76 and an upside capture ratio of 148.
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