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All Contents © 2019The Kiplinger Washington Editors
By Kent Thune
| November 28, 2016
The only certain thing about 2017 is that it will be challenging for investors. And that is exactly why we’re here to help investors out … by lighting the path to the 10 best mutual funds to buy for the coming year.
The backdrop right now is a difficult one: rising interest rates, a maturing business cycle, a new president. Investors have good reason to feel cautious, if not downright nervous.
But now is not the time to hit the sidelines and move completely into risk-off mode.
In any market, bull or bear, you’ll have your share of underperformers and outperformers, so if there’s any money to be made, you need to find the latter. And more broadly, there are plenty of plays designed to capture gains while protecting against the next correction.
We’ve selected our top 10 list of the best mutual funds for 2017, then, with both eyes on the difficult market and economic conditions in mind. This list represents a diverse roster that should help you navigate the challenging year ahead.
I wish the best of luck to all of you. With no further ado, here are the 10 top mutual funds to buy for next year:
Type: Broad index
Expenses: 0.16%, or $16 annually for every $10,000
Minimum initial investment: $3,000
A solid portfolio of mutual funds begins with a core holding, and the best fund to do the job in 2017 is the Vanguard 500 Index Fund.
Although its close relative, Vanguard Total Stock Market Index (VTSMX), is the largest stock mutual fund in the world by measure of assets under management, its exposure to small- and mid-caps could hold it back.
In a year that will likely be predominately risk-off, you’ll want to use a core holding like VFINX that concentrates only on U.S. large-cap stocks, like those found in the S&P 500 index. That means top holdings such as Apple Inc. (AAPL), Alphabet Inc (GOOG, GOOGL) and Microsoft Corporation (MSFT).
All for a skinflint 0.16% in annual expenses.
Minimum initial investment: $2,500
Economic conditions are pointing toward the idea that we’re at the mature phase of the business cycle. Thus, while having S&P 500 exposure is recommended for any investor, you might want to consider some broad growth exposure via funds like the Fidelity Nasdaq Composite Index Fund.
Value-oriented funds can work well to provide stability in a volatile environment. However, growth stocks are usually the overall winners when the economy is healthy and interest rates are rising.
By the simple virtue of tracking the Nasdaq Composite Index, FNCMX is chock full of big large-cap growth stocks. Apple, Microsoft and Alphabet are among top holdings, as are Amazon.com, Inc. (AMZN) and Facebook Inc. (FB).
In fact, the index is fairly overweight these names. The top 10 holdings include eight tech stocks for about 30% of the fund’s weight, and overall, information technology makes up roughly half the fund’s holdings.
Type: Sector (Healthcare)
A Trump win in the presidential race in 2016 has already given the healthcare sector a boost — if only because Hillary Clinton’s defeat should hold back reform in the sector.
That momentum should continue in 2017 for funds like Vanguard Health Care Fund.
The VGHCX isn’t a way to jump into the high-growth (but high-risk) re-emergence of biotech stocks that came amid Trump’s victory. But there’s still plenty of room to run in pharmaceuticals such as fund holdings Bristol-Myers Squibb Co. (BMY), Merck & Co., Inc. (MRK) and Eli Lilly and Co. (LLY).
VGHCX does offer exposure to biotech stocks, but only at about 15% of the fund. Other segments include healthcare equipment, tech and managed healthcare services.
Healthcare sector mutual funds like VGHCX are also good defensive plays, providing an added layer of value for shareholders should the market begin a downward trend in 2017.
Type: Industry (Banking)
Rising rates, Trump and a Republican Congress all combine to make financial stocks attractive for 2017 — heck, through the end of 2016, too!
That makes Fidelity Select Banking Fund one of the best funds to buy for all of next year.
While it is true that rising interest rates can begin to create narrower spreads between interest they pay customers for deposits and Treasury bills, which erodes at bank profits, this may not be a problem until spreads reach normal levels. But fed rates are so abnormally low now that a rise in rates could help banks to widen the spreads before narrowing them.
If this environment plays out in 2017, as it is expected, bank stocks like FSRBX top holdings Wells Fargo & Co. (WFC), US Bancorp (USB), and Bank of America Corp. (BAC) could have a great year.
Also, note that while Fidelity Select Banking Portfolio technically does have a tiny amount of exposure to brokerages and insurance companies, this is a banking fund — not a broad financials fund like, say, the Financials SPDR (XLF).
Type: Sector (Consumer staples)
A smart (and admittedly defensive) play for diversification would be to add consumer staples stocks. My favorite way to do that is through the Fidelity Select Consumer Staples Fund.
2016 has been a tough year for consumer staples stocks, and in fact, the sector as a whole is essentially at breakeven with about six weeks left in the year. So FDFAX is very much a contrarian play as we head into 2017.
Still, an aging bear market and higher valuations could create more uncertainty for investors and thus favor for funds like FDFAX.
Top holdings in this fund include Procter & Gamble Co (PG), British American Tobacco PLC (BTI) and CVS Health Group (CVS).
Type: Sector (Energy)
If energy goes without a serious hiccup between here and the end of the year, it will end up as one of 2016’s top-performing sectors.
And while momentum admittedly has slowed, mutual funds like the Vanguard Energy Fund still look attractive heading into 2017.
OPEC continues to near some sort of deal to cap (or even cut) production as Iran increasingly looks like it will play ball. Should that happen, we’ll see the necessary switch to lower supply and more demand, which should push oil prices higher in 2017. Thus, funds heavy in oil stocks — such as VGENX — should do well in the year ahead.
VGENX is heavy in integrated and upstream oil & gas firms including Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX), but also offers a little exposure to refining, equipment and storage plays too.
Type: Bond (Floating rate)
If rates rise as expected in late 2016 and throughout 2017, bond prices will fall, and most bond mutual funds will see low to slightly negative returns.
That’s why funds such as T. Rowe Price Floating Rate could be a smart alternative to traditional bond index funds.
Rising rates tend to be bad for most types of bond funds, but floating-rate funds like PRFRX may be able to weather the fixed rate storm in 2017. Also called bank loans, floating-rate notes or “floaters,” floating-rate bonds adjust on a regular basis and the respective interest rate is tied to a benchmark, such as the U.S. Treasury bill rate, the Libor or the prime rate.
This means that, unlike conventional bonds, floating-rate bonds may actually appreciate in value during periods of rising interest rates — just like those that we are likely to see in 2017.
Type: Bond (Corporate)
If the U.S. economy remains relatively healthy and interest rates resume a slow and steady climb upward, another bond mutual funds you’ll want to have at your side is the Vanguard Short-Term Investment Grade Fund.
Rising interest rates typically send bond prices down, and the bond funds that get hit the hardest are the ones that hold long-term bonds. Short-term bonds, however, are less sensitive to interest-rate changes and therefore can hold up better in rising rate environments.
Also, investment-grade bonds, like those in the VFSTX portfolio, have higher yields than comparable Treasuries. This is why, if the economy remains on sound footing in 2017, you’ll get a decent combination of price stability plus the yields of investment-grade bonds with funds like VFSTX.
Type: Tactical allocation
Minimum initial investment: $1,000
If you want to hedge against inflation while keeping market risk to a minimum — and you want to do so with very little effort on your end — check out the Hussman Strategic Total Return for 2017.
HSTRX’s portfolio consists primarily of fixed-income securities, but Hussman’s hedge fund-like tactics will have him moving significant amounts of fund assets to cash, stocks or commodity-based securities when he sees opportunities for gains in volatile markets.
For instance, as of the most recently released data (Sept. 30, 2016), HSTRX was sitting on about 50% cash, just under 40% in bonds and just 10% in stocks. Those stocks, by the way, were primarily gold miners such as Newmont Mining Corp (NEM) and Barrick Gold Corporation (ABX).
Actively managed funds have been losing to passive funds in many mutual fund categories this year. Thus, 2017 could turn out to be a year for the best balanced funds like the Vanguard Balanced Index Fund.
Portfolio managers and many financial media pundits have incorrectly called the new beginning of rising rates for years. What would make 2017 any different?
Balanced funds are what they sound like — they’re funds that allocate to both stocks and bonds, typically somewhere between a 60%-40% in either direction. VBINX is considered a “moderate” allocation fund, and it’s right up against those limits, offering a 60%-40% split between stocks and bonds.
The bond portfolio is intermediate-term in nature, while the stocks are a pretty even split of sectors that leans most heavily toward financials and technology.
If you want to play both sides of the risk-return fence, and you don’t want to bet on the same forecasts that have been wrong in recent years, VBINX may be the best choice of funds for you.
This article is from Kent Thune of InvestorPlace. As of this writing, he did not personally hold a position in any of the aforementioned securities, although he holds VTSMX and VBINX in some client accounts.
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