The best mutual funds for the rest of 2016 will likely share two overlapping themes — defense and diversification.
The worst enemy of capital markets is uncertainty. We know this from history, but the markets received a stark reminder of this reality via a swift shift to risk-off mode in the wake of the surprise Brexit result.
The initial shock and uncertainty faded, with stocks resuming the modestly positive climb we saw prior to the Brexit. But more uncertainty is looming ahead — namely, whether we will see another interest rate hike in 2016, not to mention the result of November’s presidential election.
There’s plenty to make investors jittery.
In this kind of environment, it’s wise not to make big bets on any one asset type, industrial sector or niche area of stocks or bonds. And moving everything to cash won’t likely be the best move either.
With all that advice in mind, here are (in no particular order) the best mutual funds for the rest of 2016.
Best Mutual Funds for the Rest of 2016: Hussman Strategic Total Return Fund (HSTRX)
Expenses: 0.69%
Minimum Initial Investment: $1,000
Uncertain times and the volatility and downside pressure that come along with them are the right kind of conditions for hedge fund-like mutual funds, such as Hussman Strategic Total Return Fund (MUTF:HSTRX).
HSTRX is one of the best mutual funds in times of economic uncertainty and challenging market conditions — which sounds an awful lot like most of 2016 — and may continue to excel for the foreseeable future. Portfolio manager John Hussman is ahead of 97% of tactical allocation funds with a gain of more than 11% near the end of 2016’s first half.
The portfolio consists primarily of fixed-income securities, but Hussman’s hedge fund-like tactics will have him moving significant amounts of fund assets to cash, stocks or commodity-based securities when he sees opportunities for gains in volatile markets. Right now, he likes miners Newmont Mining Corp (NYSE:NEM) and Barrick Gold Corporation (USA) (NYSE:ABX).
Best Mutual Funds for the Rest of 2016: Vanguard Wellesley Income Fund (VWINX)
Expenses: 0.23%
Minimum Initial Investment: $3,000
If you’re looking for a more conventional means of limiting downside pressure while still capturing decent gains should the market continue its climb in the second half of 2016 … well, Vanguard Wellesley Income (MUTF:VWINX) is a solid choice.
With the broad market stock indices mostly sitting on low-single-digit gains on the year and the Federal Reserve’s next move looking more and more uncertain, a fund with the right mix of stocks and bonds can produce market-beating returns.
A conservative blend of high-quality bonds and large-cap stocks like Microsoft Corporation (NASDAQ:MSFT), Wells Fargo & Co (NYSE:WFC) and Johnson & Johnson (NYSE:JNJ) has VWINX beating the S&P 500 in 2016.
If the remainder of the year looks anything like the first six months, or if the market turns negative, VWINX should prove to be among the best mutual funds you should be holding on to for 2016’s second half.
Best Mutual Funds for the Rest of 2016: Fidelity Select Healthcare Portfolio (FSPHX)
Expenses: 0.73%
Minimum Initial Investment: $2,500
While it won’t usually pay to be too concentrated right now, there are a couple of specific shots that investors can take right now.
The healthcare sector has had a tough 2016, but don’t let that dissuade you from defensive stock funds like Fidelity Select Health Care Portfolio (MUTF:FSPHX).
Healthcare products and services are essential to most consumers, which is why the health sector is considered be a defensive one. Although the sector has been beaten down by falling biotechnology stocks, and the tough political talk on pharmaceutical pricing has pushed down prices, the long-term attributes of an aging population and advances in medical technology remain attractive.
Therefore, now can be a good time to pick up bargain-priced shares of funds like FSPHX, which focuses on healthcare stocks like Medtronic plc (NYSE:MDT), Amgen, Inc. (NASDAQ:AMGN) and Boston Scientific Corporation (NYSE:BSX).
Best Mutual Funds for the Rest of 2016: Vanguard Mid Cap Index (VIMSX)
Expenses: 0.2%
Minimum Initial Investment: $3,000
If you’re looking to avoid large caps because of a strong dollar and small caps should the market shift back to risk-off mode, one of the best mutual funds to hold now might be right in the middle: the Vanguard Mid Cap Index (MUTF:VIMSX).
As plenty of research has shown, mid-cap stocks are in the “sweet spot” of the market capitalization spectrum when it comes to risk-adjusted returns. And if the bull market has more room to run, mid-cap stocks tend to beat large-caps in the latter phase of the business cycle.
If you already hold a large-cap stock fund, a passively managed mid-cap stock fund like VIMSX won’t have much overlap with it. But keep in mind that in a big market correction, mid-cap stocks like top holdings Nvidia Corporation (NASDAQ:NVDA), Fiserv Inc (NASDAQ:FISV) and Electronic Arts Inc. (NASDAQ:EA) can decline as much or more than large caps.
Best Mutual Funds for the Rest of 2016: Vanguard Total Stock Market Index (VTSMX)
Expenses: 0.16%
Minimum Initial Investment: $3,000
In uncertain times, diversification is key, and Vanguard Total Stock Market Index (MUTF:VTSMX) is one of the best funds on the market to diversify a portfolio.
Although S&P 500 index funds are great diversifiers and solid core holdings, a strong dollar will weigh heavier on the large-cap stocks that dominate the S&P 500. Therefore a low-cost total stock index fund like VTSMX looks like a better idea in 2016.
Yes, VTSMX does hold large-cap stocks like Apple Inc. (NASDAQ:AAPL), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft, but it also holds mid- and small-cap stocks for a more diverse, complete coverage of the U.S. total stock market.
Best Mutual Funds for the Rest of 2016: Fidelity Select Gold Portfolio (FSAGX)
Expenses: 0.94%
Minimum Initial Investment: $2,500
As the Brexit and the first half of 2016 recently reminded us, when investors are fearful about the global economic environment, they increasingly buy gold bullion and funds like the Fidelity Select Gold Portfolio (MUTF:FSAGX).
Conditions that can support higher gold include a weak U.S. dollar, weak global economies, high demand for physical gold and low or falling interest rates.
But one overriding factor that trumps all of them is uncertainty … and that should be in large supply in the second half of 2016.
Uncertainty over the strength of the European economy, uncertainty over interest rates and currencies, uncertainty over the result of the U.S. presidential election. These could press more investors into buying more tangible assets like gold, which means higher prices for FSAGX top holdings Randgold Resources Ltd. (ADR) (NASDAQ:GOLD), Goldcorp Inc. (USA) (NYSE:GG) and Newmont Mining.
Best Mutual Funds for the Rest of 2016: Vanguard Total Bond Market Index (VBMFX)
Expenses: 0.16%
Minimum Initial Investment: $3,000
To extend the diversification theme to the fixed income portion of your portfolio, Vanguard Total Bond Market Index (MUTF:VBMFX) may be the best bond fund to do it.
VBMFX tracks the Barclays U.S. Aggregate Float Adjusted Index, which covers more than 8,000 bonds in the U.S. bond market.
Some investors and many financial media pundits don’t like bond index funds when rates are expected to rise, but how many times have the pundits, and even many of the best fixed income portfolio managers in the world, predicted what rates would do over the past three or four years?
The conventional thinking is that active fund managers can shift their portfolios to bonds with lower sensitivity to interest rates or even to cash, whereas index funds are forced to passively fall off of the proverbial price cliff as rates rise.
For recent history on the failure of active bond fund managers, VBMFX has beaten nearly two-thirds of intermediate-term bond funds for past three years and nearly 90% for the past year.
Best Mutual Funds for the Rest of 2016: Vanguard Short-Term Investment-Grade (VFSTX)
Expenses: 0.2%
Minimum Initial Investment: $3,000
Investors betting that the Fed will continue their tightening in the second half of 2016 may want to consider buying a mutual fund like Vanguard Short-Term Investment-Grade (MUTF:VFSTX).
If rates resume their rise, it’s an indication that the U.S. economy is still in growth mode, albeit at a modest pace. And since, in a rising interest rate environment, bonds of longer duration usually fall in price more than those of shorter duration, short-term bond funds like VFSTX can do better than the long-term bond funds and probably better than bond index funds.
And with a moderately strong economy, investment-grade bonds that make up the VFSTX portfolio can perform better, or at least put up higher yields, than high-quality bonds.
Naturally, though, continued Brexit worries could keep a lid on this one.
Best Mutual Funds for the Rest of 2016: USA Mutuals Barrier Fund Investor Class Shares (VICEX)
Expenses: 1.44%
Minimum Initial Investment: $2,000
One of the best mutual funds that focuses on defensive stocks is USA Mutuals Barrier Fund Investor Class Shares (MUTF:VICEX) — more commonly known as the Vice Fund.
The Vice Fund holds stocks that can fall under the unofficial equity categorization of “sin stocks” because they include companies in the gaming, tobacco and alcoholic beverage industries, though VICEX also includes aerospace and defense stocks.
VICEX makes a solid defensive stock fund because sin stocks can hold up better than the major market indices during challenging economic times thanks to widespread underpricing thanks to the less-than-desirable nature of their businesses — and in the case of tobacco stocks, high dividends. Year-to-date, VICEX is beating well more than 90% of category peers and is crushing the S&P 500 index.
Top holdings for the vice fund were recently Philip Morris International Inc. (NYSE:PM), Reynolds American, Inc. (NYSE:RAI), and Altria Group Inc (NYSE:MO).
Best Mutual Funds for the Rest of 2016: Vanguard Energy (VGENX)
Expenses: 0.37%
Minimum Initial Investment: $3,000
Oil and energy stocks have seen some volatility in 2016, especially in the wake of the Brexit, but energy sector funds like Vanguard Energy (MUTF:VGENX) can be good buys now.
2016 has been the best year to buy oil-related stocks in the past seven years or so. With the price of oil hitting a multiyear low in 2015, and strong performance in 2016 that looks to provide more momentum in the coming months, the best energy funds could outperform major market indices for the rest of 2016.
Also, VGENX doesn’t hold the riskier small-cap energy stocks, and instead the portfolio consists of high-quality large-cap names like Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX).
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds VTSMX, VBMFX and VWINX in 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.
