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4 Funds with a Good Sharpe Ratio for a Volatile Market

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Nitish Marwah
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Long-term government debt yields came in below short-term bills on Jun 3. While, yields on 3-month U.S. Treasury Bill remained flat at 2.349%, the yield on 10-year U.S. Treasury Note plunged to 2.062%, its lowest since September 2017. This resulted in further widening of inversion in the yield curve.

As a matter of fact, the yield curve inversion between 3-month Treasury bill and the 10-year Treasury note increased to its highest levels since the financial crisis.

Per reports on Jun 4, the U.S. government is looking to step up investigations against four major American tech companies. The probe is related to concerns about antitrust violations as well as reportedly dubious business practices of these major tech behemoths.

Moreover, there have been reports that the U.S. Justice Department could launch a probe against both Amazon AMZN and Apple AAPL, related to business malpractices. Facebook FB too is likely to be probed on similar charges by a team from the Federal Trade Commission.

Under such jittery conditions, mutual funds that are likely to offer healthy returns along with a lower level of risk are popular choices. But to identify funds that can offer such features, one should find out a way of measuring a fund’s risk-adjusted return. This is where the Sharpe ratio comes into play. Created by Nobel laureate William F. Sharpe, the Sharpe ratio is one of the popular ways of measuring funds’ performances on the basis of risk-adjusted return. A fund with a higher Sharpe ratio is believed to be more attractive than one with a lower ratio.

What Does Sharpe Ratio Mean for Mutual Funds?

The Sharpe ratio of a mutual fund measures its average return relative to the level of volatility the fund experiences. It indicates the value that a fund delivers for the risk it poses, in other words, its risk-adjusted return. The numerator of the ratio consists of a fund’s mean return over a given time period subtracted by the return of a risk-free investment over the same period, say U.S. government Treasury bonds or bills. Meanwhile, its denominator comprises standard deviation of a fund’s return, which measures the level of fluctuation of returns, over the same time frame.

So, Sharpe Ratio = (Average Return - Risk Free Return)/Standard Deviation

This ratio indicates how much extra return one can derive from a portfolio by taking additional risk. It is generally speculated that Sharpe ratio calculated over a three-year or longer period of time should be considered while assessing the performance of a fund in terms of risk-adjusted return. We have already seen that the higher the Sharpe ratio, the more will be the fund’s attractiveness among risk-averse investors. Moreover, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options.

4 Best Choices

We have, thus, selected four mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (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 three-year Sharpe ratio which is greater than 1.

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).

BlackRock Allocation Target Shares Series A Portfolio BATAX fund aims for a high level of current income that is consistent with capital preservation. In order to pursue its objective, the fund will primarily invest in asset-backed securities, and commercial and residential mortgage-backed securities issued or guaranteed by the government of the United States.

This Sector – Govt Mtge-Intermediate 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.

BATAXhas a Zacks Mutual Fund Rank#1 and an annual expense ratio of 0.01%, which is below the category average of 0.81%. The fund has one and three-year returns of 4.6% and 6%, respectively. BATAX had a Sharpe ratio of 2.9 in the last three years.

Red Oak Technology Select ROGSX fund invests 80% of its assets in securities of companies from the technology sector. The fund invests in both U.S. and non-U.S. stocks.

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.

ROGSX has a Zacks Mutual Fund Rank#2 and an annual expense ratio of 0.94%, which is below the category average of 1.29%. The fund has one and three-year returns of 19.8% and 27.6%, respectively. ROGSX had a Sharpe ratio of 2.1 in the last three years.

Fidelity Advisor Series Growth Opportunities Fund FAOFX 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 a Zacks Mutual Fund Rank#1 and an annual expense ratio of 0.01%, which is below the category average of 1.07%. The fund has one and three-year returns of 41.4% and 28.2%, respectively. FAOFX had a Sharpe ratio of 2.06 in the last three years.

Janus Global Technology T JAGTX 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 a Zacks Mutual Fund Rank#1 and an annual expense ratio of 0.92%, which is below the category average of 1.29%. The fund has one and three-year returns of 21.8% and 29.6%, respectively. JAGTX had a Sharpe ratio of 2 in the last three years.

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