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3 Funds With High Treynor Ratio for Risk-Taking Investors

Per the latest data from IHS Markit, its flash U.S. Composite PMI Index surged to 54.7 in August from 50.3 in the previous month. The metric increased to its highest settlement since February 2019. Furthermore, the data firm’s flash indicator for the manufacturing sector rose to its highest levels since January 2019.

On the other hand, the indicator for America’s service sector was at its highest settlement since March 2019. Any reading above 50 indicates growth. Also, IHS Markit’s flash composite new orders index rose to 54 this month, its highest since March 2019.

Meanwhile, the ISM Manufacturing Index increased to 54.2% in July from 52.6% in the previous month. The metric also surpassed the consensus estimate of 53.5% and reached its highest settlement in the past 15 months. A level above 50% implies that the manufacturing sector is expanding.

Furthermore, on Aug 4, the Commerce Department stated that U.S. factory orders for July rose 6.2% to $437.2 billion.

Under such circumstances, risk-loving investors should consider parking their money in mutual funds with high Treynor ratios. Notably, the Treynor ratio equates excess returns over the risk-free rate to the additional risk taken by an investor.

What Does Treynor Ratio Mean for Mutual Funds?

Treynor ratio, also sometimes referred to as the reward-volatility ratio, essentially measures how successful an investment is in terms of returns, taking into consideration the inherent level of risk involved. This ratio was developed by Jack L. Treynor. Mathematically, the Treynor ratio is calculated as follows:

Treynor Ratio = (Rp – Rf)/βp

Where,

  • Rp = Expected Portfolio Return
  • Rf – Risk Free Rate
  • Beta(p) = Portfolio Beta

The Treynor ratio assumes that since risk is an unavoidable element of any investment, it has to be fined. Moreover, the higher the value of the Treynor ratio, the better it is from an investor’s perspective because it indicates higher returns generated from high risks.

3 Best Choices

We have, thus, selected three mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000 and each of these funds has a high three-year Treynor ratio.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Franklin DynaTech Fund Advisor Class FDYZX seeks appreciation of capital by investing primarily in common stocks. FDYZX invests a major portion of its assets in equity securities issued by companies, which are believed to be leaders in innovation and benefiting from new industry conditions. The fund may invest in both domestic and foreign companies.

This Sector - Tech product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FDYZX carries a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.61%, which is below the category average of 1.05%. The fund has three and five-year returns of 26.3% and 20.9%, respectively. FDYZX had a Treynor ratio of 22.4 in the last three years.

Fidelity Select Software & IT Services Portfolio FSCSX fund invests the majority of its assets in companies whose primary operations are related to software or information-based services. It primarily focuses on acquiring common stocks of both domestic and foreign companies.

This Sector - Tech product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSCSX carries a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.71%, which is below the category average of 1.29%. The fund has three and five-year returns of 25.9% and 23.2%, respectively. FSCSX had a Treynor ratio of 24.2 in the last three years.

Red Oak Technology Select Fund ROGSX invests 80% of its assets in securities of companies from the technology sector. The fund invests in both U.S. and non-U.S. stocks.

This Zacks sector - Tech product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

ROGSX carries a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.95%, which is below the category average of 1.29%. The fund has three and five-year returns of 19.8% and 20.5%, respectively. ROGSX had a Treynor ratio of 17.36 in the last three years.

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