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4 Low-Risk Mutual Funds to Buy as Rate Hike Looks Likely

Zacks Equity Research

For the past few sessions, rising concerns over a possible rate hike in the near term following hawkish comments from key Fed officials weighed on the markets. Investors preferred to remain cautious ahead of Fed Chairwoman Janet Yellen’s speech on the U.S. economic policy at Jackson Hole, Wyoming on Friday. Additionally, uncertainty prevailed over oil prices movement, which also weighed on broader markets.

In this context, mutual funds that are capable of offering favorable returns and bear a lower level of risk might be prudent investment options. And to identify low-risk mutual funds, we have used Sharpe ratio which is used to measure a fund’s risk-adjusted return.

Rate Hike Worries Escalate

The minutes of the Federal Reserve’s July 26–27 meeting show that policy makers were divided over their views on rate hikes. However, recent comments by some of the key Fed officials fueled speculation of a rate hike in the coming months. 

Fed Vice Chairman Stanley Fischer recently stated that a rate hike this year is still under consideration. He added that the job market is nearing full employment. Fisher also said that the economy is moving toward achieving its 2% inflation target. According to him, the Fed’s preferred price benchmark minus food and energy cost is at 1.6%, which was “within hailing distance of 2 percent.”

New York Federal Reserve Bank President William Dudley said that the time to raise interest rates is approaching and could happen as early as September. Dudley said that the labor market added 190,000 jobs on average in the last three months and that the economy should gain momentum in the second half of the year. He added that “we’re starting to see signs of wage gains starting to accelerate.”
Further, Atlanta Fed President Dennis Lockhart said that "early indications of third-quarter GDP growth suggest a rebound.” He also feels that the economy is strong enough to withstand at least one rate hike this year. 

Oil on Choppy Ground

The WTI crude posted the third straight weekly gain on Friday.  A 2.5 million barrel drop in domestic crude inventories in the week ending Aug 12 drove oil prices.Further, both Russia and Saudi Arabia’s willingness to consider a collective production cap pushed oil prices higher.

However, crude prices declined on Monday after analysts of Morgan Stanley said that any agreement between major oil producing nations to freeze crude production is "highly unlikely." This is mainly because there are “too many headwinds and logistical challenges” to any such production freeze deal.

After registering seven straight sessions of gains, WTI crude prices fell 3.1% to $47.05 per barrel, posting their biggest fall since Aug 1. Brent crude also declined 3.5% to $49.16 a barrel.

How to Identify Low-Risk Funds?

Before selecting funds, it is important to identify appropriate indicators that can effectively measure the risk level of a fund. This is the reason why we have used Sharpe ratio to screen low risk mutual funds. Sharpe ratio generally measures a fund’s average return relative to the level of volatility experienced by the same. Further, Sharpe ratio indicates how much extra return one can derive from a portfolio by taking additional risk.

This means that the higher the Sharpe ratio, the more attractive the fund will be among risk-averse investors. Now, in terms of an ideal Sharpe ratio, most investors think mutual funds with a Sharpe ratio higher than 1 are good investment options. (Read: 4 Top-Ranked Mutual Funds with a Good Sharpe Ratio)

4 Funds on Focus

We have selected four mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) and have 3-year Sharpe ratio greater than 1. Moreover, these funds have impressive year-to-date (YTD) returns. They also have minimum initial investment within $5000 and low expense ratios.

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.

American Funds American Balanced A ABALX seeks growth of income and capital for the long run. ABALX invests mainly in securities and investment-grade bonds. The fund invests its assets in securities of both U.S. and non-U.S. companies. The fund has YTD return of 7.3%, and an expense ratio of 0.58% as compared to the category average of 0.94%. ABALX has a Zacks Mutual Fund Rank #1 and 3-year Sharpe ratio of 1.19.

Commerce Value CFVLX normally invests more than 65% of its assets in equity securities. CFVLX seeks appreciation of capital and income for the long run. The fund invests mainly in those companies which fall within the range of the Russell 1000 Value Index. The fund has YTD return of 12.5%, and an expense ratio of 0.70% as compared to the category average of 1.11%. CFVLX has a Zacks Mutual Fund Rank #1 and 3-year Sharpe ratio of 1.08.

American Century Utilities Investor BULIX seeks long-term growth of capital and income. BULIX invests the major portion of its assets in securities of companies involved in the utilities sector. The fund has YTD return of 19.6%, and an expense ratio of 0.67% as compared to the category average of 1.38%. BULIX has a Zacks Mutual Fund Rank #1 and 3-year Sharpe ratio of 1.17.

Baird Intermediate Bond Investor BIMSX invests the large chunk of its assets in various types of dollar-denominated bonds. BIMSX seeks returns higher than the total annual return of the Barclays Intermediate U.S. Government/Credit Bond Index. The fund aims to invest only in those bonds which are rated investment-grade. The fund has YTD return of 4.6%, and an expense ratio of 0.55% as compared to the category average of 0.79%. BIMSX has a Zacks Mutual Fund Rank #2 and 3-year Sharpe ratio of 1.46.

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