Millions of investors rely on mutual funds as the backbone of their investing strategy. With thousands of mutual funds to choose from, though, it can be hard to pick the best one for current market conditions. As 2017 begins, we decided it would be good to give you some smart fund choices to think about for the coming year. Here you'll learn about Vanguard Energy Fund (NASDAQMUTFUND: VGENX), Vanguard Value Index (NASDAQMUTFUND: VIVAX), andVanguard Inflation-Protected Securities Fund(NASDAQMUTFUND: VIPSX). Read on and see which fund looks most compelling for your portfolio.
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Use this to ride the wave of an oil recovery in 2017
Matt DiLallo (Vanguard Energy Fund): After a couple of brutal years, oil prices came roaring back in the middle of last year. While prices are still low, energy companies have pushed costs down to the point where they can get back to business as usual, even at current prices. Further, with OPEC stepping forward to support the oil market, it suggests that 2017 should see energy earnings start rising. One way to profit from this trend is to invest in a mutual fund focused on oil stocks. While there are more than a hundred options to choose from, in my opinion, the Vanguard Energy Fund is the top choice.
What I like about the Vanguard Energy Fund is that it offers investors global exposure acrossthe entire value chain, including producers, service companies, and logistics providers. As of last October, the fund had invested $10.35 billion in 148 different holdings. What I like even more about this fund is that it offers investors the low fees that are the calling card of Vanguard. If fact, its expense ratio is 0.37%, which is 75% less than funds with similar holdings, meaning investors get to pocket more of the profit. However, unlike Vanguard's inexpensive passively managed index funds and ETFs, this is an actively managed fund, which gives its managers the ability to pick and choose the best opportunities. For example, fast-growing shale driller Pioneer Natural Resources (NYSE: PXD) was its second-largest holding, putting it above several big oil giants.
The fund's managers have done a great job picking energy winners over the long term and have consistently outperformed similar funds according to Morningstar. That earned it five-stars from the mutual fund reviewer and the No. 1 rating among the 114 equity energy funds rated by U.S. News & World Report. Bottom line, for investors seeking to fuel their portfolio with oil-driven gains, the Vanguard Energy Fund is the best mutual fund to buy in 2017.
Betting on value
Tim Green (Vanguard Value Index): It's no secret that value stocks tend to outperform growth stocks in the long run. Buying a well-diversified set of stocks trading at low multiples of earnings and/or book value is a sound strategy. Value investing sometimes goes out of favor, with the dot-com bubble a notable example. But it always delivers when your time horizon is measured in decades.
Value stocks aren't without risk. Some stocks are cheap for good reason. Investors can be fooled into buying a so-called "value trap," suffering major losses as the underlying company's fundamentals deteriorate. For those not wanting to take the risk of choosing wrong, the Vanguard Value Index Fund is a great way to diversify away that risk.
The Vanguard Value Index Fund is big, with total assets of roughly $50 billion. This allows the fund to have a low expense ratio of just 0.22%. With 324 positions, investors are getting a well-diversified value portfolio without the hassle of choosing their own stocks. This is a large-cap fund populated with well-known companies, so it won't give you any exposure to small-cap stocks. But for those looking for a quick and easy way to bet on value, the Vanguard Value Index Fund is a good way to do it.
Dan Caplinger (Vanguard Inflation Protected Securities): Stock mutual funds have done well lately, but many investors want balanced exposure that includes assets other than stocks. Yet rising rates have many market participants nervous about bond mutual funds. In that environment, Vanguard Inflation-Protected Securities Fund has some benefits that most bond funds don't.
The Vanguard fund invests in inflation-indexed bonds, whose par value and interest payments are linked to the rate of inflation. If consumer prices rise, then the value of the inflation-indexed bond also rises to keep the bond's purchasing power constant. To the extent that rising rates stem from increased expectations about inflation, inflation-indexed bonds should hedge against that risk. That in turn should prevent big price changes on these bonds, leading to greater stability for the Vanguard fund.
It's important to understand that even inflation-indexed bonds aren't entirely invulnerable to rising rates. If rates climb because of factors other than inflation, then the Vanguard fund can lose money. However, for those who don't need much current income but want the inflation protection that these special bonds can provide, Vanguard Inflation-Protected Securities Fund is worth a closer look.
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Dan Caplinger has no position in any stocks mentioned. Matt DiLallo has no position in any stocks mentioned. Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.