We’re nearing the midpoint of 2015 and the second half is shaping up to look significantly different than the first half. Now is a good time to consider strengthening your portfolio with some of the best sector funds to buy for the rest of 2015.
The market is beginning to shift into a transitional period where investors are getting nervous about market risk for both stocks and bonds. The price-to-earnings ratio on the S&P 500 is 20, which is not nosebleed level but certainly a point at which seasonality and global concerns, such as the Greek debt saga, are enough to keep downside pressure on prices.
Bonds are under pressure from the fast-approaching reality of rising interest rates. With stocks and bonds both looking weak, where can investors go to maximize returns but still minimize the downside? The answer may be to look at sectors that can potentially capture any remaining upside potential but also with defensive qualities to minimize the downside.
With that, I give you three of the best sector funds to buy for the rest of 2015:
3 Best Sector Funds to Buy for the Rest of 2015: Vanguard Health Care (VGHCX)
Load Fee: None
Expenses: 0.34%, or $34 annually for every $10,000 invested
Minimum Initial Investment: $3,000
Health sector stocks have room to grow in 2015 and can also be a great defensive play. But you’ll need a low-cost, diversified fund like Vanguard Health Care (VGHCX) to get the job done.
Biotechnology stocks have fed much of the growth in the health sector but biotech is arguably overbought, which is a why minimal exposure to this hot sub-sector of health is best at this time. Top holdings in the Vanguard Health Care portfolio include big pharmaceutical companies, such as Bristol-Myers Squibb (BMY) and Actavis (ACT), and managed care firms like UnitedHealth Group (UNH).
This diversified structure has resulted in short-term performance slightly below average for health sector funds but long-term performance for VGHCX is solidly ahead of the average health sector fund. And this is the kind of portfolio that might work best in the second half of 2015.
3 Best Sector Funds to Buy for the Rest of 2015: Powershares QQQ (QQQ)
Load Fee: N/A
Expenses: 0.20%, or $20 annually for every $10,000 invested
Minimum Initial Investment: N/A
Rising interest rates and a growing economy are generally bad for value-oriented, dividend-paying stocks but can be great for growth stocks and tech-heavy funds like Powershares QQQ (QQQ).
QQQ is not a pure tech sector fund but it tracks the NASDAQ 100 Index, which consists of more than 50% technology stocks with a few other sectors, such as healthcare and consumer discretionary stocks. Top holdings include Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN).
Large-cap growth and tech names like these top holdings in QQQ are likely to be a better bet in the second half of 2015 than some of the flashier growth stocks like Alibaba (BABA).
Year-to-date, QQQ has a healthy price gain of 6.8%, which compares to 3.2% on the S&P 500 and 6.0% for the average large growth fund. This edge looks to continue in the second half of the year.
3 Best Sector Funds for the Rest of 2015: Consumer Staples Select Sector SPDR (XLP)
Load Fee: N/A
Expenses: 0.15%, or $15 annually for every $10,000 invested
Minimum Initial Investment: N/A
Investors wanting to start getting defensive now can consider buying shares of Consumer Staples Select Sector SPDR (XLP).
Current economic and market conditions aren’t exactly screaming for investors to get defensive now but there’s no telling, with exception of hindsight, when a big correction will take place.
A diversified consumer defensive stock fund like XLP provides exposure to large-cap household names whose products consumers generally continue to buy regardless of the economic climate. In a big economic downturn, consumers won’t be quick to stop buying their household products, sodas and cigarettes. And companies that offer these products — Proctor & Gamble (PG), Coca-Cola (KO), and Philip Morris (PM) — are XLP’s top holdings.
To summarize our list of funds to buy for the rest of 2015, investors are wise to consider using sector funds as satellite holdings in a broadly diversified portfolio. For example, a smart move can be to have three or four sector funds, each with about 5% to 10% allocation.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds XLP in some client accounts. His No. 1 holding is his privately held investment advisory firm. Under no circumstances does this information represent a recommendation to buy or sell securities.
