The possibility of a spike in interest rates in the near future triggered a wave of selling on Apr 22, with the Dow witnessing its worst one-day percentage loss since Oct 28, 2020. The broader S&P 500 and the tech-laden Nasdaq also plummeted as Fed Chair Jerome Powell’s recent hawkish comments weighed on investors’ sentiments. The stock market gyrated throughout the week to end on a gloomy note on Friday, with the Cboe Volatility Index moving above its long-term average.
Recently, in front of an International Monetary Fund panel, Powell mentioned that taming inflation is essential, putting a 50-basis-point (bps) rate hike on the table for May, citing a CNBC article. In fact, the Fed has kept the door open for more rate hikes in the near term. The CME FedWatch Tool, in the meantime, noted that there is a 94% chance that the Fed may hike rates by 75 bps in June, as mentioned in a MarketWatch article. Notably, a rate hike does not bode well for the stock market since borrowing costs go up for business houses and consumers are left with less disposable income. These factors could impact corporate earnings vis-à-vis stock prices.
With things not looking up for stocks at the moment, alternative mutual funds could be the best choice for investors. This is because such funds can hedge risks, provide solid returns despite difficult times, and are known to have a diversified portfolio. Moreover, mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
So, what are alternative mutual funds? Predominantly these funds include market-neutral funds and long/short equity funds. Investors of all income groups can avail these types of funds. A market-neutral fund tends to go long on an outperforming asset while it shorts the underperformer. Consider taking a $1-million long position in Chevron and a $1-million short position in Exxon Mobil, both of which are giant oil companies. Now, if oil stocks plunge, you will lose the money put on Chevron because of the long position but will gain from Exxon Mobil because of the short position. Similarly, irrespective of the market scenario, long/short mutual funds seek to help investors gain from shorting the overvalued stocks and buying the undervalued ones.
Thus, we have selected two such alternative mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.
Calamos Market Neutral Income Fund Class A CVSIX is known for deploying short-selling techniques to improve income and hedge against market risks. Jason Hill is the Lead Manager of CVSIX since Aug 4, 2013, and most of the fund’s exposure is in sectors such as technology, finance and retail trade as of 3/31/2022.
CVSIX’s three-year and five-year annualized returns are nearly 4% and 3.8%, respectively. Last year, CVSIX gave a commendable return of 4.7%. The fund is also less volatile compared to peers. In the past three-year period, CVSIX’s standard deviation came in at 3.33%, less than funds of similar nature, please click here.
CVSIX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.14%, which is below the category average of 1.79%. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Aberdeen U.S. Sustainable Leaders Smaller Companies Fund Class A MLSAX is known for investing majority of its assets in long and short positions of publicly traded companies. MLSAX aims to achieve long-term capital appreciation.
Qie Zhang is the Lead Manager of MLSAX since Nov 30, 2020, and most of the fund’s exposure is in sectors such as technology, industrial cyclical and finance as of 3/31/2022.
MLSAX’s three-year and five-year annualized returns are 18.6% and 15.2%, respectively. In 2021, MLASX gave a superb return of 28.4%. MLSAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.22%, less than funds of similar nature, please click here.
To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
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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.