by David Fabian | July 19, 2013 8:50 am
The major indices continued hitting new highs this week on the back of renewed rhetoric and commitment from Federal Reserve Chairman Ben Bernanke, but the rally in stocks is starting to make many investors wonder when the music will ultimately stop … and who is going to be left without a chair to sit down on.
The real winners in 2013 have been go-go stocks like Tesla Motors (TSLA) and iRobot Corp (IRBT), which have posted impressive triple-digit returns. These offensive powerhouses have reached stratospheric heights, but if you are worried about protecting your gains, then it might be time to switch to stocks or funds that play defense. Protecting your hard-earned profits will allow you to put money back to work in stocks at better valuations once some of this overbought momentum has been worked off.
Your first stop on the road to portfolio protection will likely be cash, which is a good short-term holding area from which to survey the investment landscape. However, stable value is really the only benefit to staying in a money market fund. If you want to continue to move the needle forward on your portfolio even in turbulent times, then you need some quality holdings that will continue to add value.
The following article outlines five funds that might be useful tools for your portfolio in the event that stocks really have reached their peak:
Conservative investors that are looking for a modest yield while having a low sensitivity to interest rates might consider an ultra-short duration bond fund such as the PIMCO Enhanced Short Maturity ETF (MINT).
According to Index Universe, this ETF has accumulated more than $1.7 billion in new assets this year as investors have looked to shorten the duration of their fixed-income portfolios. With the yields in money market accounts essentially at zero, even an ETF like MINT — with a distribution yield of 0.77% — looks attractive … particularly when you consider that there are very little price fluctuations because of its focus on the short end of the yield curve. This option could present an excellent safe harbor for retirees or minimum-volatility seekers that aren’t concerned with a few months of reduced coupon payments.
An ultra-short-bond fund should be used as a temporary holding spot for excess cash that you want to put back to work in stocks or bonds at more attractive prices. It reminds me of a phrase I often use: “Nice place to visit, but I wouldn’t want to live there.” This conservative option will serve your portfolio well during times of volatility.
MINT charges just 0.35% in expenses, or $35 of each $10,000 invested.
When it comes to picking a conservative allocation fund for your portfolio, there is no better place to turn than the James Balanced Golden Rainbow Fund (GLRBX). This five-star Morningstar-rated fund has been persistently outperforming its peers for more than two decades. Its investment mandate is to achieve total return through both growth and income while preserving capital in declining markets.
The fund primarily invests in undervalued stock and fixed-income securities with a healthy balance between the two asset classes. One of the keys to the funds success has been the leeway it gives its managers to increase or decrease the amount of stock or bond exposure in the portfolio. That way, they are able to tactically shift their strategy to adapt to changing market conditions.
With a total expense ratio of 1.07%, GLBRX is a bargain for the expertise and track record that it has provided investors for the past two decades.
I have been a big fan of low-volatility ETFs since the initial launch of the PowerShares S&P 500 Low Volatility Portfolio (SPLV) back in 2011. The basis behind the strategy for this ETF is to take the underlying S&P 500 Index and identify a subset of 100 stocks that have the lowest price volatility for the last quarter.
What you are left with is a unique portfolio of stocks that typically have very steady returns and smaller price fluctuations. The top sectors within SPLV include utilities, consumer staples and financials, which combined make up nearly 70% of the fund’s asset allocation. That leaves you with stocks such as Johnson & Johnson (JNJ), NextEra Energy (NEE) and Kellogg (K).
Generally you will see these low-volatility funds decline less than their fully loaded index peers during periods of price decline. For trend followers and active managers, these funds may give us the ability to stay invested during periods of short-term market corrections instead of getting stopped out of a position.
This ETF makes an excellent addition to any portfolio as a core large-cap holding in a diversified investment vehicle. In addition, PowerShares also has low-volatility ETFs available in small-cap, midcap and international regions.
If you are looking for a conservative index fund with a low expense ratio, then the Vanguard LifeStrategy Conservative Growth Fund (VSCGX) might be a perfect fit.
The fund sticks to a rigid allocation of 28% domestic stocks, 12% international stocks, 48% domestic bonds, and 12% international bonds. This 40/60 allocation of stocks and bonds is widely considered to be a conservative asset allocation benchmark.
One of the advantages of owning a balanced fund is that the volatility in bonds and stocks offset each other, which creates a smooth price trend. While you give up the potential for higher returns, you also gain the assurance that you will not experience as much draw-down as a typical stock-only index.
One of the most attractive qualities of VSCGX is its 0.15% expense ratio, which is one of the lowest in the industry. Vanguard always has been known as a company that will stand behind low-cost index strategies for its investors.
Floating-rate notes make an excellent alternative to traditional fixed income because they contain an adjustable coupon feature that resets every 90 days, according to an interest-rate index such as Libor. This makes them less susceptible to interest-rate volatility.
The iShares Floating Rate Note ETF (FLOT) holds investment-grade floating-rate notes primarily of financial and industrial sector companies. This ETF has been very stable despite the volatile interest-rate environment this year because of the very short duration of its portfolio. FLOT represents notes with the highest credit quality, which is why the yield is only 0.45%; however, the price of this ETF should remain stable even if interest rates move higher.
Floating-rate notes have been well-publicized as an alternative safe haven to longer-duration bonds in the event that the Federal Reserve starts to tighten its monetary policy. This ETF might be a temporary hiding spot for a portion of your portfolio in the event that we see additional volatility in credit this year.
David Fabian is Managing Partner and Chief Operations Officer of Fabian Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Learn More: 3 Tenets of Sound Risk Management
Source URL: http://investorplace.com/2013/07/5-defensive-funds-to-guard-your-nest-egg/
Short URL: http://invstplc.com/1nwRvYX
Copyright ©2016 InvestorPlace Media, LLC. All rights reserved. 700 Indian Springs Drive, Lancaster, PA 17601.