Funds for Easing Back into Stocks
The stock market panic of 2008 is still on the minds of most investors. That's why, even in the midst of a rally in the broader stock market, investors continue to retreat from stock funds. Year-to-date, the S&P 500 has gained 9 percent, yet investors have pulled $29 billion out of stock funds and injected $212 billion into taxable bond funds through September, according to the Investment Company Institute.
"Average equity funds are making money, and investors keep pulling out of them and moving money into fixed-income," says Todd Rosenbluth, an equity analyst with Standard & Poor's. "We think that is in part a concern about risk."
If you're ready to wade back into the stock market, Rosenbluth suggests investing in well-known, blue-chip companies that have become strongholds in their respective sectors. "One way to offset the risk that your equity fund has is to invest in funds that have historically been less volatile and that own stocks that have historically been less volatile," Rosenbluth says.
Investors can look to large-cap funds to spread their bets among an assortment of these types of stocks. Some of these funds provide a decent amount of income: The average large-cap value fund currently yields 2.7 percent. (In the S&P 500, the average yield is 2 percent.) While stocks are inherently riskier than bonds, dividend payers are generally less volatile than other types of stocks and their payouts can provide a cushion during down markets. "If you're picking funds that have historically paid and increased their dividends, you're going to get yield and protect some of your downside," Rosenbluth says.
With that in mind, Standard & Poor's analysts singled out three funds they believe are solid picks for investors interested in high-quality stocks with low risk metrics. Over time, these funds have offered protection on the downside and maintained fairly low volatility, according to S&P standards. Their holdings have generally shown consistent earnings and dividend growth over the past 10 years. These funds have outperfomed their peers over the past five years, and each contains high-quality holdings and low annual fees compared with their peers. In addition, all are five-star rated funds by S&P (its highest rating).
Dreyfus Core Equity (symbol DLTSX)
This fund is heavy on stocks in the consumer goods and energy sector.It holds a number of stocks that are highly rated by S&P, including Coca-Cola and Exxon Mobil, which are both rated "strong buys." Over the past five years through the end of October, this large-cap core fund has returned an annualized 2.4 percent, about one percentage point higher than the category average over the same time period. Its annual fees are 1.25 percent.
Invesco Diversified Dividend (LCEAX)
Manager Meggan Walsh seeks companies with upside potential and healthy dividend yields. Currently, the fund is overweight in the financial services and consumer goods sectors. Within its portfolio, S&P favors Johnson Controls (an S&P "strong buy" recommendation) and Automatic Data Processing (an S&P "buy" recommendation). The large-cap value fund has gained an annualized 3.6 percent over the past five years, while the average large-cap value fund has barely broken even over the same time period. The fund's annual fees are 1.13 percent.
MFS Massachusetts Investors Trust (MITTX)
Generally, management won't deviate much from the sector weightings of the S&P 500. Currently, the fund is slightly overweight in financials, healthcare, and technology. The fund holds S&P "buy"-rated stocks Proctor & Gamble and industrial materials company Danaher. Over the past five years, this large-cap core fund has returned an annualized 3.2 percent. Its annual fees are 0.93 percent.
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