5 low-risk funds for cautious investors

Low-risk funds are taking on added importance in today's market, but investors need to look under the hood.

  • By Todd Shriber,
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With the S&P 500 (.SPX) lower by 12.08% year-to-date, a loss that has been trimmed in a big way thanks to a dramatic rally off the March lows, it’s not surprising that many investors are evaluating low-risk funds as avenues for volatility reduction.

In a bull market, reducing risk is often seen as a bland strategy that, for equity investors, often revolves around shifting to sectors with defensive characteristics, including consumer staples and utilities. These days, skirting risk is more of an encompassing strategy, one that includes avoiding companies with dubious recovery prospects while focusing on higher quality fare.

That gets us to the utility of low-risk funds. While not perfect — some are betraying their lower risk profiles this year — these products do offer several important traits, not the least of which is removal of the stock picking burden. With that in mind, here are five low-risk funds that stand out now:

  • Fidelity Income Conservative Bond Fund (FCONX)
  • SPDR MSCI USA Strategic Factors ETF (QUS)
  • Nationwide Risk-Managed Income ETF (NUSI)
  • Vanguard LifeStrategy Conservative Growth Fund (VSCGX)
  • FlexShares US Quality Low Volatility Index Fund (QLV)

Let’s dive a bit deeper into what makes each of these funds key low-risk alternatives that investors may want to consider now.

Fidelity Income Conservative Bond Fund

Expense Ratio: 0.35%, or $35 annually per $10,000 invested

The Fidelity Income Conservative Bond Fund (FCONX) is part of an expansive lineup of Fidelity funds, both active and passive, many of which are suitable for risk takers as well as those looking for docile market experiences. FCONX clearly resides in the latter camp as it’s positioned as conservative approach to fixed income investing.

One way of looking at FCONX is that it’s a potentially attractive alternative to low-yielding money market and savings accounts — dreadful places to stash cash at a time when U.S. interest rates reside around historic lows.

FCONX usually invests “in fixed rate securities with a maximum maturity of two years or less and floating rate securities with a maximum maturity of three years or less,” according to Fidelity.

This low-risk fund lobs off a decent 30-day SEC yield of 2.19% and its duration — a gauge of a bond’s sensitivity to changes in interest rates — is just 0.40 years. Nearly two-thirds of the fund’s holdings rated AAA, AA or A, meaning both credit and rate risk are low with this Fidelity product.

SPDR MSCI USA Strategic Factors ETF

Expense ratio: 0.15% per year

Among exchange traded funds that are considered lower risk, the SPDR MSCI USA Strategic Factors ETF (QUS) is an overlooked idea, but it has more than $712 million in assets under management. QUS, which turned five years old last week, is a multi-factor fund that focuses on the low volatility, quality and value factors.

Those are distinct factors, but they often intersect with each other, particularly low volatility and quality. At the moment, quality, 2019’s best-performing factor, continues looking attractive because the novel coronavirus crisis is shining a light on companies that have the ability to survive in trying times as well as those with immense vulnerabilities. As State Street, QUS’s issuer, points out, quality is thriving at just the right time.

“The returns for quality reflect the current market environment: Investors are seeking companies with high-quality balance sheets and stable earnings, as levered firms with volatile earnings patterns are likely to be challenged amid the economic turmoil,” said the fund issuer.

QUS allocates 44% of its weight to technology and healthcare stocks.

Nationwide Risk-Managed Income ETF

Expense ratio: 0.68% per year

The Nationwide Risk-Managed Income ETF (NUSI) is a low-risk fund that can be deployed by a wide array of investors, including retirement planners, due to its juicy yield and hedging mechanism.

A simple though accurate view of NUSI is that it’s a low volatility, higher income alternative to the popular though low-yielding NASDAQ-100 Index. Simplifying the low-risk fund’s strategy, it sells covered call options on that index to generate income. However, NUSI doesn’t stop there. It buys protective puts with some of the covered call proceeds, meaning there’s a bit of a buffer for NUSI investors should the likes of Apple (AAPL) and Microsoft (MSFT) retreat.

In a bull market, it would be reasonable to expect NUSI to lag pure beta funds tracking the NASDAQ-100, but we’re not in a bull market. As such, NUSI is higher by 3.41% year-to-date and beating the parent index by nearly 300 basis points.

Vanguard LifeStrategy Conservative Growth Fund

Expense ratio: 0.12% per year

The Vanguard LifeStrategy Conservative Growth Fund (VSCGX) fits the bill as a low-risk fund because it features dual exposure to bonds and stocks, while favoring the former.

“The Conservative Growth Fund seeks to provide current income and low to moderate capital appreciation,” according to Vanguard. “The fund holds 60% of its assets in bonds, a portion of which is allocated to international bonds, and 40% in stocks, a portion of which is allocated to international stocks.”

VSCGX carries a minimum investment of $3,000, but its modest annual fee of 0.12% is not only tolerable, but it means this product is less expensive than 85% of competing funds.

VSCGX accomplishes its investment objectives by holding other Vanguard funds, not individual securities, a strategy keeps costs low. The strategy is straight forward as its four components are two broad market — one domestic, one international — fixed income funds and two broad-based equity funds; domestic and foreign.

Proving it is a low-risk investment, VSCGX’s beta against the Dow Jones U.S. Total Stock Market Index is just 0.37, according to Vanguard data.

FlexShares US Quality Low Volatility Index Fund

Expense ratio: 0.23% per year

The FlexShares US Quality Low Volatility Index Fund (QLV) is another example of an ETF that blends the low volatility and quality factors, but this is a different animal than the aforementioned QUS.

QLV follows the Northern Trust US Quality Low Volatility Index, a benchmark designed to identify high quality companies that have the potential to deliver superior risk-adjusted returns. The index uses a broad quality overlay, scoring companies based on cash flow, management efficiency and profitability while excluding the 20% with the lowest scores.

“Low volatility investing is an attempt to minimize the fluctuation of the value of an investment over a period of time and is often considered as a defensive strategy,” said FlexShares in a recent note. “Applying the quality factor to a low volatility strategy may allow an investor to capture more of the market upside potential while protecting against downside risks.”

QLV is performing slightly better than the S&P 500 this year. The fund holds 138 stocks, which are spread almost evenly across the blend, growth and value styles.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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