U.S. equity markets are witnessing high levels of volatility from the start of this year. Moreover, there is little chance of levels of certainty returning in the months ahead. This is primarily due to a slump in oil prices, the Greek economic crisis, weak economic conditions in Europe and Japan as well as weakness in key emerging markets. Lower than expected corporate earnings and the prospect of a rate hike are domestic factors adding to investor concerns.
International Concerns
A currency war is being played out with many countries choosing loose monetary policies to stimulate growth and prevent deflationary pressure. This is in contrast to the U.S. Fed policy of tightening the stimulus. Diverging central bank policies have pushed the U.S. dollar up to multi-year highs
Meanwhile, both the World Bank and International Monetary Fund (IMF) recently cut their growth forecast for the next two years. The World Bank projects the global economy to expand 3% this year and 3.3% in the next, down from 3.4% and 3.5%, respectively. On the other hand, IMF lowered its global growth outlook to 3.5% from 3.8% for 2015, representing the sharpest cut in three years. Growth for 2016 is forecasted at 3.7% versus the previous projection of 4%.
Bracing for a Rate Hike
Last month, the Federal Reserve took the investor community by surprise when it announced that the central bank intends to raise benchmark interest rates at some point this year as it believes that the U.S. economy is improving steadily.
Ever since the Fed ended its six-year long quantitative easing program in October last year and hinted at increasing the short-term fund rate in 2015, investors have been speculating about the timing of the planned interest rate hike.
The Fed has said it would consider the sluggish economies of Asia and Europe before making the final call. Moreover, low inflation and a strong dollar are deterrents to a quick raise. Strong labor market data has strengthened the belief that the hike could happen sometime in mid-2015. However, uncertainty about its exact timing continues to heighten investor concerns.
Low Risk Picks
Mutual funds with low betas are an ideal choice for risk-averse investors. These are typically funds with a beta lower than one. A beta higher than one indicates that the price is more volatile than the market as a whole. A beta of less than one indicates that the price of the stock or fund is less volatile than the market.
These funds also carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) as we expect the funds to outperform its 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 the likely future success of the fund.
The minimum initial investment for the funds is $5000. The funds have no sales load and carry low expense ratio.
PIMCO Real Estate Real Return Strategy D (PETDX – MF report) seeks to provide maximum real return. The fund invests in real estate-linked derivatives and a basket of inflation-indexed securities to achieve its investment objective. It also invests in Fixed Income Instruments including bonds and debt instruments issued by domestic or foreign public and private sector entities.
PETDX has a 3-year beta of 0.53 against standard index and currently holds a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has a one-year return of 33.4% and a three-year annualized return of 14.4%. The fund carries an expense ratio of 1.14% as compared to category average of 1.32%.
Fidelity Telecom and Utilities (FIUIX – MF report) seeks both capital growth and current income. The fund focuses on acquiring common stocks, investing heavily in telecom and utility companies. It may purchase both foreign and domestic securities. The fund utilizes fundamental analysis to select its holdings, studying both firm specific and broader market and economic factors.
FIUIX has a 3-year beta of 0.53 against standard index and currently holds a Zacks Mutual Fund Rank #1 (Strong Buy). The fund has a one-year return of 13% and a three-year annualized return of 16.1%. The fund carries an expense ratio of 0.76% as compared to category average of 1.28%.
Goldman Sachs Real Estate IR (GRETX – MF report) seeks to offer both dividend income and long-term capital appreciation. The fund usually invests in equity securities issued real estate companies or companies from related sectors. A maximum of 20% of its assets may be utilized to purchase fixed income securities. This includes government, bank and corporate debt as well as other equity securities.
GRETX has a 3-year beta of 0.49 against standard index and currently holds a Zacks Mutual Fund Rank #2 (Buy). The fund has a one-year return of 27.5% and three-year annualized return of 14.7%. The fund carries an expense ratio of 1.16% as compared to category average of 1.32%.
