7 Mutual Funds to Dump Now

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Now is a good time to focus less on the best mutual funds to buy and focus more on the best mutual funds to sell.

7 Mutual Funds to Dump Now

Stock prices, as measured by the S&P 500 index, are only about 2% off their historic highs, and the “lower for longer” monetary policy of the Federal Reserve appears to be transitioning into “higher sometime sooner,” as a rate hike looks inevitable by July.

Therefore, selling shares of select mutual funds can be a good idea now.

Although an economic recession and a stock market crash don’t look likely for 2016, a rising rate environment can spell the end of a bull run for several types of mutual funds. And don’t forget the weak seasonal trend for the summer months, which will be followed by a presidential election that won’t exactly excite the market.

So, with that backdrop, here are seven widely held mutual funds you might want to consider selling now.

Mutual Funds to Dump Now: American Funds Smallcap World Fund (SMCWX)

Mutual Funds to Dump Now: American Funds Smallcap World Fund (SMCWX)Expenses: 1.07%, or $107 for every $10,000 invested; 5.75% front load
Minimum Initial Investment: $250

Rising interest rates often coincide with a reduction in risk appetites and funds like the American Funds Smallcap World Fund (SMCWX) could fall behind the major market indices in this environment.

Although higher rates usually lead to a stronger dollar, which can be positive for non-U.S. companies, investors tend to start shying away from small- and mid-cap stocks, as well as foreign stocks, when the Fed goes in to tightening mode.

SMCWX holds about 40% of its portfolio assets in small- and mid-cap U.S. stocks like Domino’s Pizza, Inc. (DPZ), Molina Healthcare, Inc. (MOH) and Incyte Corporation (INCY), but almost 50% of the fund invests in foreign stocks. If investors get more into a risk-off mode, funds that hold stocks like these could see a difficult 2016.

Mutual Funds to Dump Now: Fidelity Contrafund (FCNTX)

Fidelity Contrafund (FCNTX)Expenses: 0.71%
Minimum Initial Investment: $2,500

Although Fidelity Contrafund (FCNTX) is one of the biggest and best large-cap stock mutual funds on the market, its growth leanings will likely hold back performance in the near-term.

As I stated in a story on the best and worst funds for rising interest rates, because the stock market is a forward-looking, discounting mechanism, the expectations for rising interest rates (and thus the cost of borrowing) will shrink future growth prospects, along with growth stock prices.

Although FCNTX does hold some stocks like Berkshire Hathaway Inc. (BRK.A, BRK.B), which is not considered growth, most of the fund’s holdings are big growth stocks like Facebook Inc (FB) and Alphabet Inc (GOOG, GOOGL) that may present more risk than reward for the remainder of 2016.

Mutual Funds to Dump Now: Fidelity Select Retailing Portfolio (FSRPX)

Mutual Funds to Dump Now: Fidelity Select Retailing Portfolio (FSRPX)Expenses: 0.81%
Minimum Initial Investment: $2,500

Consumer cyclical stocks may lose some steam in 2016, and the Fidelity Select Retailing Portfolio (FSRPX) is a leader in the sector that investors may want to trim back on now.

2015 was a strong year for consumer cyclical stocks, as the buying power of consumers was boosted by low borrowing rates and low gas prices.

Also called consumer discretionary stocks, consumer “cyclicals” like top holdings Amazon.com, Inc. (AMZN), Home Depot Inc (HD), and TJX Companies Inc (TJX), helped power FSRPX to an 18.4% gain in 2015.

Year-to-date, FSRPX is stalling with a decline of .36%. With more headwinds likely in the near-term, now is a good time to sell off some winnings and cut exposure to the sector fund.

Mutual Funds to Dump Now: T. Rowe Price Global Technology Fund (PRGTX)

Mutual Funds to Dump Now: T. Rowe Price Global Technology Fund (PRGTX)Expenses: 0.91%
Minimum Initial Investment: $2,500

The technology sector has seen a roller coaster of a year and a recent jump in prices makes for a good exit point for funds like the T. Rowe Price Global Technology Fund (PRGTX).

Technology stocks were among the hardest hit in January’s market route, but some of the best tech sector mutual funds like PRGTX, which is up more than 15% in the last three months, have erased most or all of their early-year losses.

But rising interest rates and seasonal downside pressure are likely to weigh heavily on technology stocks, as investors enter risk-off mode and trim off some winnings.

Therefore, smart investors will look to hit the exit on some of their riskier mutual funds like PRGTX before the crowd starts selling.

Mutual Funds to Dump Now: Tocqueville Gold Fund (TGLDX)

Mutual Funds to Dump Now: Tocqueville Gold Fund (TGLDX)Expenses: 1.43%
Minimum Initial Investment: $1,000

The first five months of 2016 were strong for gold mutual funds like the Tocqueville Gold Fund (TGLDX), but the remainder of the year doesn’t look so favorable for the precious metal.

Many gold mutual funds and exchange-traded funds, especially those that invest in miners, saw gains of more than 50% through the end of April. But now that economic conditions support a Fed rate hike by the summer, gold funds have started a retreat that may continue for several months.

TGLDX holds physical gold, but the portfolio also includes miners like Detour Gold Corporation (DGC), Franco Nevada Corp (FNV), and Randgold Resources Ltd. (ADR) (GOLD). With the biggest advances in 2016 for gold mutual funds and ETFs coming from mining stocks, the biggest declines could come from these same stocks if gold prices don’t hold up for the remainder of the year.

Mutual Funds to Dump Now: Vanguard High-Yield Corporate Fund (VWEHX)

Mutual Funds to Dump Now: Vanguard High-Yield Corporate Fund (VWEHX)Expenses: 0.23%
Minimum Initial Investment: $3,000

If you’ve been looking for an opportunity to reduce exposure to high-yield bonds, now can be a good time to sell shares of mutual funds like the Vanguard High-Yield Corporate Fund (VWEHX).

Junk bonds and the funds that hold them had a tough 2015, which ended on a negative note. But the last three months have seen gains of more than 8% for the average high-yield bond fund.

Although the U.S. economy appears to be on solid ground, which is generally bullish for junk bonds, higher interest rates will put downside pressure on all bonds. And if the economy hits another soft patch, prices for high-yield bonds and mutual funds like VWEHX can turn negative again.

Mutual Funds to Dump Now: Vanguard Long-Term Bond Index Fund (VBLTX)

Mutual Funds to Dump Now: Vanguard Long-Term Bond Index Fund (VBLTX)Expenses: 0.16%
Minimum Initial Investment: $3,000

Long-term bond funds like the Vanguard Long-Term Bond Index Fund (VBLTX) are more sensitive to interest rates than short- and intermediate-term bond funds; with interest rates expected to rise soon, investors are wise to reduce exposure to long-term bonds now.

Smart investors know that bond prices move in the opposite direction as interest rates, but many investors may not realize that bonds with longer maturities generally fall farther in price when the Fed is tightening.

And because index funds are passively managed, the fund manager can’t shorten maturities to minimize the negative hit from rising interest rates like actively managed funds can do.

Therefore, long-term bond index funds like VBLTX are at higher risk of falling prices now than a short- or intermediate-term bond fund or a broadly diversified index fund like Vanguard Total Bond Market Index Fund Investor Shares (VBMFX).

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. However, he holds FCNTX and VBMFX for some client accounts. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/05/mutual-funds-dump-now/.

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