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Buy These 4 Low Beta Mutual Funds to Brave Volatility

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The stock market dropped significantly on Sep 9, only to bounce back yesterday. Such volatility is the result of the Fed's ambiguous stance regarding monetary tightening measures. To top it, profit expectations are down for this year, while stocks remain overvalued.

We are also heading toward the Presidential elections, which may lead to a correction. Hence, in order to safeguard ones portfolio from such uncertainties, we advise investors to bet on low beta mutual funds.

Markets on a Topsy-Turvy Ride

U.S. stocks suffered their worst decline on Sep 9 since the U.K.'s decision to exit the European Union, with all 30 blue-chip companies closing in the red and all 10 sectors of the S&P 500 ending in the negative territory. Rout in equities had pushed both the Dow and the S&P 500 below their 50-day moving averages. One the other hand, both the indices closed more than 1% higher on Monday, with more stocks advancing rather than declining. About 70% stocks advanced on the NYSE, while 27% declined.

Lest we forget, the fear-gauge CBOE Volatility Index (VIX) continues to hover near the 15% mark. Even though a reading above 20 is considered alarming, the jump to the current level is significant, considering the fact that the index was near 12 for a sustained period.

So, what is the reason behind these erratic movements? Many analysts pointed to uncertainty created by Fed officials about when and how policy rates will be changed to be the primary reason behind such gyrations. Chances of the Fed backing away from an easy-money policy are high, thanks to Boston Fed President Eric Rosengren's hawkish comments. This has dampened investor sentiments substantially. However, concerns about an imminent rate hike ebbed yesterday following Fed Governor Lael Brainard's dovish stance.

Rate Hike Ambiguity

Rosengren backs a gradual rate hike as he believes that waiting too long might affect some asset markets like commercial real estate. He believes that "a reasonable case can be made for continuing to pursue a gradual normalization of monetary policy".

But, Brainard said that the Fed should be "prudent" with regard to raising interest rates. Since low unemployment rate failed to boost inflation, she believes that "the case to tighten policy preemptively is less compelling". She remained cautious about the difficulties in the global markets and its impact on the U.S. economy. She added that leaving rates unchanged since December has "served us well in recent months, helping to support continued gains in employment and progress on inflation".

Meanwhile, Federal Reserve Bank of Atlanta President Dennis Lockhart said that the current economic scenario warrants a "serious discussion" about rate hike. But, he did mention that he didn't "feel that we are incurring the costs of patience that put a lot of urgency on the question of raising rates." Minneapolis Fed President also added that when it comes to raising rates, "there doesn't appear to be a huge urgency to do anything, frankly."

More Volatility in Autumn

Volatility might further go up as profit expectations for this year will be trimmed in the wake of a discouraging third-quarter earnings season. As of Sep 9, third-quarter earnings growth are expected to decline 3% compared to the same period last year (read more: Looking Ahead to the Q3 Earnings Season ).

Moreover, stocks are pretty pricey this time around which makes us believe that the market may be facing a correction sooner than later. The broader market is trading at 17.5x the 2017 consensus projection of $125 EPS (read more: How Overvalued Are Stocks? ).

Uncertainty over the impending presidential electionmay also lead to a correction in the near term (read more: Here's How Presidents and Elections Affect the Stock Market ).

Buy 4 Low Beta Mutual Funds Now

Amid such uncertainty, it will be prudent to pick safe mutual funds. Such funds are inherently less volatile than the markets they trade in. In this case, a low beta ranges from 0 to 1.

We have selected four low beta mutual funds that have given positive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio.

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

American Funds American Balanced A ABALX invests in a broad range of securities, including common stocks and investment-grade bonds. ABALX's 3-year and 5-year annualized returns are 8.4% and 11.5%, respectively. Annual expense ratio of 0.58% is lower than the category average of 0.94%. ABALX carries a 3-year beta of 0.67.

Invesco Income Allocation A ALAAX invests its assets in a selection of underlying funds which primarily bet on international or domestic equities, fixed-income securities or real estate investment trusts. ALAAX's 3-year and 5-year annualized returns are 6.9% and 7.4%, respectively. Annual expense ratio of 0.25% is below the category average of 0.85%. ALAAX carries a 3-year beta of 0.37.

Bruce Fund BRUFX invests primarily in domestic common stocks and bonds, including convertible bonds and "zero coupons" government bonds. BRUFX's 3-year and 5-year annualized returns are 10.6% and 10.5%, respectively. Annual expense ratio of 0.67% is lower than the category average of 0.94%. BRUFX carries a 3-year beta of 0.49.

American Century Utilities Investor BULIX invests the majority of its net assets in equity securities of companies engaged in the utilities industry. BULIX's 3-year and 5-year annualized returns are 13.3% and 12.4%, respectively. Annual expense ratio of 0.68% is lower than the category average of 1.33%. BULIX carries a 3-year beta of 0.67.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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