It's a financial storm out there—but is there any safe port?
If you're wary of efforts to game the tumultuous market and looking for a haven to park your investments for the long term, mutual funds and ETFs are the most effective and cost-efficient methods to see your money grow over time. Yet not all funds are created equal. Understanding a fund's management strategy, the fundamentals of its top holdings, and its fees relative to peers can help you cut through the noise. "In the same way that you buy goods at a grocery store and you're probably looking at the ingredients to make sure there's nothing you're allergic to in there or something you don’t like, it's [the same strategy] with ETFs," explained Todd Sohn, director on the technical analysis team at Strategas Securities, a brokerage and advisory firm.
While both ETFs and mutual funds offer baskets of stocks, they differ in important ways. ETFs have lower fees and lower investment minimums. However, they typically track an existing index or series of stocks, so there's no active manager moving money around as the market zigs and zags. Actively managed funds offer just that: a live fund manager trying to time buying and selling to beat an index (Though the data on how successful that can be overall is decidedly mixed. At the end of 2022, a study from S&P Dow Jones Indices found that not one mutual fund of 2,132 beat its benchmark in the U.S. stock or bond markets consistently over the past five years). Here it's important to be mindful of the fund's "expense ratio," which is how much you're paying in fees for that hands-on approach.
John Davi, CIO and portfolio manager at Astoria Portfolio Advisors, explained that when he evaluates ETFs, he looks beyond the managing fee and takes a deeper dive into the fundamentals of the fund's holdings and also factors like its P/E ratio and earnings. As for mutual funds, Russel Kinnel, director of manager research at Morningstar, keeps it simple and said that for the average investor, fees are going to be the benchmark they should pay attention to. “Price fees are the best predictor out there, and you can use them to narrow the universe down quite a bit, depending on how picky you are,” he explained.
These are the top funds to park your money in during the downturn:
Value funds are in
When the economy tanks, the optimism that accompanies a growth stock boom dissipates, and companies have to prove they can survive in a downturn. Solid fundamentals are the name of the game when it comes to value investing, and fund managers are especially on the lookout for underpriced gems.
Vanguard Value ETF (VTV)
To get the most bang for your buck, you can go with the classic Vanguard Value ETF, which analysts explain is a basic, safe option to bet on value. Its expense ratio is 0.04%. Morningstar analysts give this ETF a gold rating because of rock-bottom fees and long-term steady returns. The fund is down 5% year to date, largely due to the overall volatility in the market, but is overall up 17% in the past three years.
“The fund is tilted toward value but doesn't take on too much risk, which is appealing if you are using this as a good core of a portfolio,” said Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA.
iShares MSCI USA Value Factor ETF (VLUE)
Rosenbluth pointed to iShares Value Factor fund as another safe pick for investors. What makes this ETF unique is that it puts together a basket of undervalued value stocks from across sectors. “The fund is looking for the most undervalued technology stocks, the most value health care stocks, and so forth, so it's a well-diversified product,” said Rosenbluth. The fund’s expense ratio is 0.150% and it has $7 billion in net total assets. The ETF’s returns are down 2.6% year to date, but over the past three years the fund is up 16%.
The fund’s top holdings include AT&T, Cisco, and Intel. “Its sector-relative approach uncovers cheap stocks from all over the market and shields it from sector biases that plague most traditional value indexes. This unique tack yields a differentiated, volatile portfolio, but it should reward investors for the added risk over the long run,” wrote Morningstar analyst Ryan Jackson of the fund.
View this interactive chart on Fortune.com
Dodge & Cox Stock I (DODGX)
Kinnel pointed to this classic value mutual fund as his pick for a long-term investment. “It has a very good fundamentals-driven value selection, and the [fund managers] are experienced researchers. So I find the fund very appealing, in addition to its fees being low, so you're not paying too much rent to management,” he explained. The fund’s adjusted expense ratio is 0.51% and its total assets under management are $90.1 billion. The fund’s top holdings include Charles Schwab, Occidental Petroleum, and Wells Fargo.
The fund earned a gold rating from Morningstar analysts, and the fund’s expense ratios are in the cheapest quartile compared to peer value funds. The fund also has an impressively long track record: Returns over the past 30 years through May 2022 beat 98% of its value category peers, according to Morningstar. Its investment returns are down 2.2% year to date, and in the past three years, the fund is up 27%.
Fixed-income options for the long haul
While fixed income took a hit in 2022 (an extremely unusual year in which both stocks and bonds were pummeled), this asset class is especially attractive now because of rising interest rates that have triggered higher yields. For investors dipping their toe into fixed income, these ETFs and funds are top-rated and fairly priced.
Vanguard Total Bond Market Index ETF (BND)
This broad, low-fee fund is a great option to incorporate the breadth and strength of the bond market into your portfolio at a low cost. “The fund’s broad scope and low fee should allow it to outperform its Morningstar Category peers over the long run,” wrote Morningstar analyst Lan Anh Tran of the fund. The fund’s expense ratio is 0.03% and its total assets are $90 billion. Its 12-month yield is 4.32%.
This fund includes investment-grade, fixed-rate, taxable U.S. bonds. This market-cap-weighted fund includes U.S Treasury bonds and corporate investment-grade bonds. In May 2022, the fund’s duration was around 6.7 years.
Schwab Short-Term U.S. Treasury ETF (SCHO)
If you are looking for a Treasury option with a shorter yield curve, this gold-rated ETF tracks the Bloomberg U.S. Treasury 1–3 Year Index, which consists of securities maturing between one and three years away. “Its efficient approach and razor-thin expense ratio make this a compelling option,” explained Morningstar analyst Zachary Evens. Its expense ratio is 0.03% and its total assets include $13.4 billion. The ETF’s yield in the past year has been 1.53%.
Because the fund tracks the short end of the yield curve, investors have lower interest rate risk, and there is no credit risk because the fund holds Treasuries only.
Fidelity Total Bond Fund (FTBFX)
In the mutual fund category, this fixed-income option allows investors to take advantage of the returns from U.S. Treasuries, investment-grade corporate bonds, and mortgages. Roughly 43% of the fund is invested in corporate investment bonds, and roughly 25% are in government Treasuries. Up to 20% of the fund can be invested in non-investment-grade bonds such as high-yield and emerging-market debt, which gives investors an edge in emerging markets, but also makes the fund slightly riskier than peer bond funds. “Deep experience, solid resources, and thoughtful execution earn Fidelity Total Bond Morningstar analyst rating of gold on its cheapest share classes,” explained Morningstar analyst Mike Mulach.
The fund strategy’s duration is usually about a third of a year of its index. The fund also follows the Bloomberg U.S. Aggregate Bond Index benchmark.
Vanguard Short-Term Inflation-Protected Securities (VTAPX)
Kinnel said his pick for an inflation-resistant mutual fund was VTAPX, which has an expense ratio of 0.06% and $15.2 billion in assets under management. “It's a Treasury Inflation-Protected Securities (TIPS) fund, which means it adjusts with inflation, but the short-term component of the fund is key because most TIPS funds are long maturity, so they're vulnerable to rising interest rates even though they protect against inflation,” he explained. Because the fund is short-term, it is less sensitive to interest rate risk, which has benefited the fund this year and last. The fund’s average effective duration was 2.6 years as of August 2022, which was over 3.5 years less than the average TIPS fund. The fund’s returns are up year to date by 1.45%, and in the past three years, the fund is up 3.5%.
If you want to bet on growth technology
While Silicon Valley may currently look like a shell of its 2021 self, for investors interested in getting in on the next wave of technology, there are some options that are worth exploring.
T. Rowe Price Mid-Cap Growth Fund (RPMGX)
Kinnel pointed to T. Rowe Price Mid-Cap Growth because the fund “has a lot of cutting-edge technology, but not completely dominated by just one sector,” explained Kinnel. The gold-rated fund has an expense ratio of 0.72% and total assets under management of $27.9 billion. The fund underweights industries like software and is more skeptical of overblown valuations in tech compared to peer funds. While that strategy hurt the fund during the tech boom of 2021, it has helped the fund in the past year. The fund is up 2.9% year to date, and up 19% over the past three years. Its top holdings include Textron, Teleflex, and Microchip Technology.
ROBO Global Robotics & Automation Index ETF (ROBO)
This is the ETF to pick if you want to invest in the buzzy area of artificial intelligence. The fund holds 80 stocks, with the top five holdings making up only 9% of the fund’s value. Year to date, the index’s net asset value is up 14%. The benefit of picking a fund that incorporates companies that will get a boon from A.I. implementation is that the fund is a blend of software and hardware, which makes it less volatile than just investing in individual companies that are implementing A.I. [For more on how to invest in A.I. you can read our in-depth guide here.]
The energy sector is poised for growth
Especially as the price of oil continues to rise, many experts are picking energy stocks to power their portfolios.
Energy Select Sector SPDR ETF (XLE)
Rosenbluth recommended this fund for his pick in the energy sector, due to it being “broadly diversified and relatively cheap.” The market-cap-weighted ETF includes energy companies in the S&P 500. Exxon, Chevron, and Marathon Petroleum are currently its top holdings.
The ETF, which was given a silver rating by Morningstar analysts, has an expense ratio of 0.1%, putting it in the lowest fee quartile compared to competitors. The fund has low volatility exposure because its portfolio has a lower standard deviation of returns and the fund has low liquidity risk exposure because it includes stocks with a lower trading volume. While the fund is down 10% year to date, the fund is up 9% overall in the past five years.
