4 Defensive Mutual Funds to Combat Negative Economic Outlook
While trade tensions appear to be at bay with the United States and China participating in active discussions to resolve the tariff war, a possible economic slowdown worldwide is looming large. This has kept investors on tenterhooks. Additionally, poor earnings projections for the first quarter have dampened investor sentiment.
Under such circumstances, defensive funds with significant exposure to health care, utilities and consumer staples sectors could be ideal for investment. These funds, comprising stocks with steady earnings and regular dividends, appear all the more lucrative economic uncertainties loom large, as in the current scenario.
Defensive funds are the best bets for stable earnings by virtue of the stocks they invest in. Defensive funds invest in defensive stocks, which are made up of companies that are engaged in the utilities, health care and consumer staples sectors. Products and services from these sectors are always in demand, irrespective of factors such as financial market conditions, how the economy is doing or various phases of the company’s business cycle.
Global Economic Slowdown in the Cards
According to a CNBC report on Feb 18, Jane Shoemake, the firm’s investment director of global equity income, said, "There is definitely a slowdown in the momentum of the global economy. I don't think the economy is going to be as strong as it was last year."
A Goldman Sachs report released in January had cited that although no major recessions were foreseen across major economies worldwide, a sharp slowdown in profit growth is likely to be witnessed in the United States and Europe.
Last month, the International Monetary Fund (IMF) also cut its global growth estimates, citing that global expansion is weakening and faster than what is expected. The IMF projected 3.5% global growth rate for 2019 and 3.6% for 2020. These were revised down 0.2 and 0.1 percentage points, respectively, from the October predictions.
S&P 500 Earnings Projections Decline in Q1
The negative earnings outlook for Q1 2019 is making investors skeptical about investing in equities.
Estimates for Q1 2019 and for the entire year have been coming down steadily, with first-quarter earnings growth now in the negative territory, which is the first quarterly earnings decline since Q2 2016. First-quarter earnings growth is projected to decline 0.4% against Q4 2018 growth of 11.2%. Annual earnings growth for 2019 is projected at 5.6% against last year’s earnings growth of 20.5%. (Read More)
4 Defensive Funds to Buy
We have selected mutual funds from defensive sectors such as consumer staples, utilities and health care. These funds 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 within $5,000.
We expect these funds to outperform 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).
Invesco Health Care Investor GTHIX seeks long-term capital appreciation by investing at least 80% of its net assets in securities of companies that are engaged in various services in the health care sector. The fund mostly invests in equity securities and may invest a significant part of its net assets in securities of mid- and large-capitalization companies.
This 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.
GTHIXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.09%, which is below the category average of 1.28%. The fund has three and five-year returns of 8.1% and 6%, respectively.
Vanguard Health Care Inv VGHCX aims for long-term capital appreciation by investing up to 80% of its net assets in equity securities of companies that are engaged in the production, development, maintenance or marketing and distribution of products and services related to the health care industry. The fund may invest half of its assets in foreign stocks.
This 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.
VGHCXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.38%, which is below the category average of 1.28%. The fund has three and five-year returns of 8.9% and 10.7%, respectively.
Fidelity Select Consumer Staples Port FDFAX seeks capital growth by investing up to 80% of its net assets in securities of companies that are engaged in manufacture, distribution and marketing of consumer staples. The non-diversified fund primarily invests in common stocks of such companies.
This Sector – Other 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.
FDFAXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.76%, which is below the category average of 1.22%. The fund has three and five-year returns of 2.2% and 6%, respectively.
Franklin Utilities A1 FKUTX seeks capital growth and current income by primarily investing at least 80% of its net assets in the equity securities of public utilities companies. These companies may include those that provide gas, water, electricity and communication services etc.
This 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.
FKUTXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.74%, which is below the category average of 1.17%. The fund has three and five-year returns of 10.7% and 9.9%, respectively.
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