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7 Mutual Funds That Should Be Banished From Your Portfolio

The "sell" picture couldn't be more clear for these mutual funds

mutual funds - 7 Mutual Funds That Should Be Banished From Your Portfolio

Source: Photo by CafeCredit.com via Flickr

Now that the election dust has settled, it’s a good time to do some portfolio house cleaning and think about which mutual funds to sell.

In addition to the relative quiet and positive market sentiment this past week, prices for stocks are at or near all-time highs and bond prices are coming under downside pressure ahead of an almost certain bump in interest rates by the Federal Reserve in December.

Put differently, we have a brief window of opportunity to make some tactical moves to dump certain types of mutual funds before 2017 brings a Trump presidency and higher rates upon us.

With that backdrop, we took a close look at several types of mutual funds that could be big losers in the weeks and months ahead and highlighted big name funds that could be in your portfolio now.

In no particular order, here are seven mutual funds that investors should consider selling:

Bad Mutual Funds: Fidelity Long-Term Treasury Bond Index (FLBIX)

Bad Mutual Funds: Fidelity Long-Term Treasury Bond Index (FLBIX)Expenses: 0.19%, or $19 annually for every $10,000 invested
Minimum Initial Investment: $2,500

With an interest rate hike looming and more on the horizon, now is a good time to dump shares of bond funds, such as Fidelity Long-Term Treasury Bond Index Fund Investor Class (MUTF:FLBIX), that invests in long-term treasuries.

Long-term bond funds, especially those that are more sensitive to interest rates, such as zero-coupon bonds, have enjoyed an amazing run, even in the past few years when interest rates were in the “lower for longer” mode.

Now that the economy looks like it can continue to grow without life support from the Fed, yields are almost certain to rise and prices will fall, with the steepest declines in longer maturities.

Also, the fact that FLBIX is passively managed, it will continue to hold long-term treasuries, which can potentially lead right over the proverbial cliff of negative returns. Sell now while you’re still ahead.

Bad Mutual Funds: American Funds American High Income (AHITX)

Bad Mutual Funds: American Funds American High Income (AHITX)Expenses: 0.67%
Minimum Initial Investment: $250

Rising interest rates will be the beginning of the end of the “search for yield” era, and funds like American Funds American High-Income Trust Class A (MUTF:AHITX) will likely get hit with downside pressure.

The vast majority of the AHITX portfolio holds below investment grade corporate bonds from companies like Sprint Corp (NYSE:S), Altice (OTCMKTS:ALLVF) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX).

AHITX isn’t the worst junk bond fund out there, but assets are nearly $17 billion, which means there is a large number of shareholders out there that may want to reduce exposure to the fund.

Bad Mutual Funds: Franklin Utilities (FKUTX)

Bad Mutual Funds: Franklin Utilities (FKUTX)Expenses: 0.73%
Minimum Initial Investment: $1,000

Higher interest rates will also place downward pressure on prices of utilities stocks (which are considered proxies for bonds), and funds like Franklin Utilities Class A (MUTF:FKUTX) are likely to get hit with low to negative returns in the weeks and months ahead.

Utilities stocks like FKUTX top holdings NextEra Energy Inc (NYSE:NEE), Edison International (NYSE:EIX) and Dominion Resources, Inc. (NYSE:D) saw strong price gains the first half of 2016, but the rally fizzled out in the third quarter and the downside pressure doesn’t look to end any time soon.

Although funds like FKUTX have already seen declines, you’ll still come out ahead of the S&P 500 year-to-date if you sell soon.

Bad Mutual Funds: Vanguard REIT (VGSIX)

Bad Mutual Funds: Vanguard REIT (VGSIX)Expenses: 0.26%
Minimum Initial Investment: $3,000

When rates go up, real estate investment trusts go down, which means poor returns on funds like Vanguard REIT Index Fund Investor Shares (MUTF:VGSIX).

Like utilities, real estate is another sector that saw strong gains in the first half of 2016, but it has progressively weakened in the second half of the year.

VGSIX holds big real estate investment trusts like Simon Property Group Inc (NYSE:SPG), Public Storage (NYSE:PSA) and Prologis Inc (NYSE:PLD).

Although mutual funds investing in REITs have already seen double-digit declines, some of the better funds in the category, such as VGSIX, are still sitting on slight gains year-to-date. Therefore, if you’re going to sell shares, you might want to do it sooner rather than later.

Bad Mutual Funds: Vanguard High Dividend Yield Index (VHDYX)

Bad Mutual Funds: Vanguard High Dividend Yield Index (VHDYX)Expenses: 0.16%
Minimum Initial Investment: $3,000

An environment of rising interest rates can be problematic for mutual funds like Vanguard High Dividend Yield Index Fund Investor Shares (MUTF:VHDYX).

Dividend funds have enjoyed a strong 2016, but an almost certain bump in interest rates (plus more increases in 2017) will drag them out of their leadership position for the foreseeable future.

Blue-chip stocks like VHDYX top holdings Microsoft Corporation (NASDAQ:MSFT), Exxon Mobil Corporation (NYSE:XOM) and Johnson & Johnson (NYSE:JNJ) can be smart holdings during turbulent times, but the economy is strong enough to warrant higher rates, which means value may lose favor to growth in the months ahead.

With that said, a good alternative to VHDYX is Vanguard Dividend Appreciation Index Fund Investor Shares (MUTF:VDAIX), which I highlighted in the recent story on the Best Vanguard Funds for a Prosperous Fourth Quarter. VDAIX holds stocks of companies that don’t necessarily have the highest yields now, but have potential for future dividend growth.

Bad Mutual Funds: Fidelity Select Technology (FSPTX)

Bad Mutual Funds: Fidelity Select Technology (FSPTX)Expenses: 0.78%
Minimum Initial Investment: $2,500

Although growth stocks in general could do well in the coming months, tech sector funds like Fidelity Select Technology Portfolio (MUTF:FSPTX) could be laggards.

President-elect Trump’s suggestion that tech stocks are in a bubble, along with his well-known distaste for net neutrality, worries investors and has placed downside pressure on mutual funds that invest broadly in the technology sector.

In the week following the presidential election, FSPTX was losing to nearly 90% of tech sector funds. The fund holds large-cap tech stocks like Apple Inc. (NASDAQ:AAPL), Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOG, GOOGL), all of which have lost 5%-plus each since Trump’s Electoral College win.

Bad Mutual Funds: Fidelity Emerging Asia (FSEAX)

Bad Mutual Funds: Fidelity Emerging Asia (FSEAX)Expenses: 1.09%
Minimum Initial Investment: $2,500

Although emerging markets stocks have seen a strong 2016, recent weeks have shown weakness. This dip may prove temporary, but funds that focus on Asian stocks, such as the Fidelity Emerging Asia Fund (MUTF:FSEAX), could face more difficulty returning to favor.

For example, the struggling Chinese economy has another cloud of uncertainty hanging over it since Trump’s stunning Election Day win last week. It’s no secret that the president-elect would like to do something about the trade imbalance and China’s currency manipulation.

Emerging markets could maintain their momentum in 2017, but the risk may not be worth the potential reward for the foreseeable future.

As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/bad-mutual-funds-to-sell-now/.

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