Recent uncertainties on global as well as domestic fronts have made investors skittish. Within the U.S., concerns are centered on a report from The Goldman Sachs Group, Inc. GS that raised concerns over valuations and low levels of volatility in technology shares. Meanwhile, uncertainties over Brexit negotiations have heightened after the surprise outcome of the recently concluded election in Britain. Moreover, the cautious stance over quantitative easing by the European Central Bank at its policy meeting has added to market uncertainty.
In such an environment, risk-averse investors should seek out government bond funds. This is because government bond funds are among the safest possible classes of mutual funds. Among these, funds investing in sovereign securities over a longer period are even safer. This is why adding government mutual funds to your portfolio will make good sense at this point which have the potential to hedge risks and offer steady returns particularly in difficult times.
Technology Shares Continue to Decline
Recently, technology shares suffered a major setback following the Goldman Sachs report, which issued warnings on valuations of major technology companies.
Moreover, as per a report released by Bank of America BAC , a division of Bank of America Merrill Lynch, in terms of price-to-earnings ratio, the tech sector has already reached its peak valuation since the financial crisis of 2008. ( Read More )
Uncertainties over Brexit Negotiations
The inconclusive UK general election result has put a question mark over the fate of Brexit negotiations that is scheduled to begin next week. Although Theresa May confirmed that she is ready to start negotiations, doubts prevail over the timing of the Queen’s speech before the new government assumes office. Additionally, just days ahead of negotiations with the EU, May’s government has lost two out of four ministers from the Brexit department.
David Jones was dismissed on Monday night and was replaced by Joyce Anelay. Additionally, George Bridges, who was responsible for pushing the Brexit legislation through parliament, resigned on Tuesday. An unexpected result for the Conservative party in the general election along with the departure of ministers from the UK’s Brexit department has heightened uncertainty.
ECB Refrains from Rate Cuts
At a news conference in Estonia, European Central Bank (ECB) president Mario Draghi dropped his rhetoric relating to “downside risks” in the European economy, thereby striking a more dovish tone than earlier views on the economic bloc. Market watchers had expected a stronger statement from Draghi amid falling Euro.
More importantly, the ECB left the benchmark interest rate unchanged and stayed away from hinting at that rate cuts. Instead, the ECB said that it is prepared to continue the current quantitative easing program for a longer period, if required. Such a statement almost immediately impacted the euro, pushing it from $1.229 versus the U.S. dollar to $1.1240.
Government Bonds are Safest Bets
Risk-averse investors interested in deriving regular income flows and protecting invested capital should considerlong-term government mutual funds.
Government mutual funds invest its assets in treasury bills, notes and securities of government agencies and instrumentalities. These mutual funds are the safest in the fund category and are considered as wise investment choices.
Buy These 3 Long-Term Government Bond Mutual Funds
As discussed, long-term government mutual funds are equipped to protect investors’ portfolio and provide steady returns amid market volatility. Here, we have selected three long-term government mutual funds which have a Zacks Mutual Fund Rank #1 (Strong Buy) or Rank #2 (Buy). Further, these funds have minimum initial investment within $5000. These funds have low expense ratios.
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.
American Funds U.S. Government Securities Fund AAMUSX seeks to offer a high level of income. AMUSX primarily invests its assets in securities sponsored by the U.S. government and its agencies, which include bonds and other debt securities denominated in U.S. dollars. The fund may also invest in debt securities with a wide range of maturities.
The fund has YTD returns of 1.9% and an expense ratio of 0.63% compared with the category average of 0.85%.
AMUSX has a Zacks Mutual Fund Rank #2.
American Funds US Government Securities F2GVTFX invests the lion’s share of its assets in securities which are guaranteed by the U.S. government and instrumentalities that include bonds and other debt securities denominated in U.S. dollars.
The fund has YTD returns of 2.3% and an expense ratio of 0.38% compared with the category average of 0.85%.
GVTFX has a Zacks Mutual Fund Rank #2.
Vanguard Long-Term Treasury Fund InvestorVUSTX seeks to offer high income. VUSTX invests the majority of its assets in U.S. Treasury securities, including bills, bonds and notes issued by the U.S. Treasury.
The fund has YTD returns of 6.6% and an expense ratio of 0.20% compared with the category average of 0.44%.
VUSTX has a Zacks Mutual Fund Rank #2.
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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.