Tag Archives: stocks

How To Avoid The Worst Sector Mutual Funds: Q3’15

Summary The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds. The following presents the least and most expensive sector mutual funds as well as the worst overall sector mutual funds per our Q3’15 sector ratings. Question: Why are there so many mutual funds? Answer: mutual fund providers tend to make lots of money on each fund so they create more products to sell. The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds: Inadequate Liquidity This issue is the easiest to avoid, and our advice is simple. Avoid all mutual funds with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the mutual fund and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the mutual fund and larger bid-ask spreads. High Fees Mutual funds should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 2.37%, which is the average total annual cost of the 632 U.S. equity sector mutual funds we cover. Figure 1 shows the most and least expensive sector mutual funds. Rydex provides three of the most expensive mutual funds while Vanguard mutual funds are among the cheapest. Figure 1: 5 Least and Most Expensive Sector Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The Fidelity Select Consumer Staples Portfolio (MUTF: FDFAX ) earns our Very Attractive rating and has low total annual costs of only 0.94%. On the other hand, the Vanguard Specialized Funds REIT Index (MUTF: VGSNX ) holds poor stocks. No matter how cheap a mutual fund, if it holds bad stocks, its performance will be bad. The quality of a mutual fund’s holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund’s performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each sector with the worst holdings or portfolio management ratings . Figure 2: Sector Mutual Funds with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Fidelity appears more often than any other providers in Figure 2, which means that they offer the most mutual funds with the worst holdings. Our overall ratings on mutual funds are based primarily on our stock ratings of their holdings. The Danger Within Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund’s performance is only as good as its holdings’ performance. PERFORMANCE OF MUTUAL FUND’S HOLDINGS = PERFORMANCE OF MUTUAL FUND Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Utilities Are Not The Safe Haven You Think They Are

On a peak to trough basis, utilities have underperformed the S&P 500 and Dow Jones Industrial Average in 2015. XLU fell 56.87% and 49.66% during each of the last two bear markets. It’s not worth the extra yield to buy something with as much risk to principal as utilities stocks. In my recent article, ” The Fed Might Do Something It Hasn’t Done In 28 Years ,” I dispelled a myth concerning the labor force participation rate that’s been floating around the financial world. Today, I turn my attention to dispelling another myth: that utilities stocks are a safe-haven investment. For some strange reason, utilities have gained a reputation for being a safe-haven during turbulent times. Perhaps that was true in the distant past. But in today’s world, it couldn’t be further from the truth. As volatility picked up in recent weeks, it wouldn’t surprise me if many investors in the Seeking Alpha community dumped some money in utilities, under the assumption that a nearly 4% yield and reliable cash flows will protect you from a potential bear market. For those investors and anyone else considering parking money in Wall Street’s notorious safe haven, the chart below might make you cringe. (click to enlarge) As you can see on the monthly chart, during each of the past two bear markets, the Utilities Select Sector SPDR Fund (NYSEARCA: XLU ), an ETF that serves as a proxy for the utilities sector, was absolutely destroyed. During the 2000 to 2002 bear market, XLU declined 56.87%. That decline was worse than the S&P 500’s (NYSEARCA: SPY ) 50.51% drop and worse than the Dow Jones Industrial Average’s (NYSEARCA: DIA ) 38.75% fall. Although XLU managed to outperform the S&P 500 and the Dow during the 2007 to 2009 bear market, it still fell 49.66% peak to trough. I can’t imagine any investor thinking a 50% drop would qualify something as a safe haven, even if that security pays a couple of percentage points more in dividends than do funds tracking the major market averages. What’s happened so far in 2015? Once again, XLU is underperforming the Dow and the S&P 500. The peak to trough declines for XLU are 17.66%, while the Dow pulled back 16.24% and the S&P 500 fell 12.54%. Unlike a bond, which matures at par, there is no contractual obligation ensuring XLU will ever return to the level at which you bought it. I realize that in today’s low interest rate environment, investors who are desperate for income may be tempted to buy utilities for the 3.79% SEC yield XLU currently sports. I’d rather make 0% in a deposit account or 3%+ in any number of individual corporate bonds, than assume the substantial risk to principal that utilities have shown in recent bear markets. Yes, I realize that during smaller bull market corrections, utilities have shown themselves to be outperformers. But who needs “safe havens” in bull markets? It’s the bear market safe havens that are valuable. And utilities, in this millennium, have been anything but a bear market safe haven. Just because everyone repeats something over and over, doesn’t mean that thing is necessarily true. An investment with substantial risk to your principal is not a safe haven, no matter how many pundits claim it is. Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.