A safe-haven appeal made gold one of the few popular investment spaces at the start of this year when the markets turned upside down. While the major benchmarks - Dow, S&P 500 and Nasdaq - are striving to return to positive territory, gold has witnessed a strong rebound.
This precious metal went through a rough patch over the past three years and touched the six-year low level after the Fed opted for a rate hike last December. Mutual funds having significant exposure to securities related to gold, struggled alongside. And like a true ally, a strong rebound in gold has also lent a solid boost to these funds in the year-to-date frame.
Spot price of gold on the New York Mercantile Exchange has gained nearly 5.2% so far this year. In fact, the yellow metal has been the best-performing non-agricultural commodity so far this year. Moreover, SPDR Gold Shares (NYSEARCA:GLD), which tracks the performance of gold bullion, has attracted nearly $959.2 million in assets this year.
This impressive performance propelled the broader mutual fund categories including Commodities Precious Metals and Equity Precious Metals. While the former category has gained 6.9% year-to-date, the latter is up nearly 4.4% in the same timeframe. In such a backdrop, precious metal mutual funds with significant exposure to gold-related securities look very attractive as an investment option. Here's a lowdown on the gold rebound.
What Made the Rebound Possible?
The continuing slump in major benchmarks, which led investors to seek shelter in safer assets, was primarily behind this recovery. The markets are suffering from a nagging oil slump, a weak Chinese economy and a flurry of soft domestic economic data since the start of 2016. The recently released economic data out of China indicated that stimulus policies opted by the central bank failed to live up to expectations.
China's official manufacturing purchasing managers index (PMI) fell from 49.7 in December to 49.4 in January. More importantly, the reading has fallen below 50, which indicates contraction in activities for the sixth straight month. Moreover, Chinese non-manufacturing PMI declined from 54.4 in December to 53.5 in January. Meanwhile, the International Monetary Fund (IMF) and World Bank recently lowered their outlook for Chinese economic growth.
On the domestic front, the "advance estimate" of the U.S. Department of Commerce indicated that the economy expanded at a pace of only 0.7% during the final three months of 2015, lower than the 2% growth rate in the third quarter. Consumer expenditure, which increased at a slower pace of 2.2% in the quarter than 3% gain in the earlier quarter, was cited as one of the main reasons for the slowdown. Moreover, the U.S. ISM manufacturing index remained unchanged at 48.2 in January, lower than the consensus estimate of 48.5. It was also the fourth consecutive month in which the index posted a reading below 50.
Signs of renewed weakness in the world's top economy and sluggish global economic conditions raised possibilities of a more patient Federal Reserve when it comes to hiking interest rates in the near term and a slower-than-planned pace of lift-offs. Fed Vice Chair Stanley Fischer stated that "a persistent tightening of financial conditions" may result in a global economic slowdown, which could also affect the inflation rate. This is a positive for non-interest bearing assets like gold.
3 Precious Metal Funds to Buy
Banking on this favorable scenario and impressive outlook for the near term, we present five precious metal mutual funds with significant exposure to gold-related securities and that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect the 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.
These funds have encouraging one-week and year-to-date annualized returns. The minimum initial investment is within $5000. These funds also have a low expense ratio and no sales load.
Fidelity Select Gold Portfolio (MUTF:FSAGX) invests heavily in companies whose principal operations are related to gold as well as in bullion or coins. A maximum of 25% of FSAGX's assets are invested in precious metals via a wholly-owned subsidiary. FSAGX focuses on acquiring common stocks of firms involved in exploration, mining, processing, or dealing in gold, or to a lesser degree, in silver and other precious metals.
FSAGX currently carries a Zacks Mutual Fund Rank #1 and has one-week and year-to-date returns of 9.7% and 6.4%, respectively. Annual expense ratio of 0.90% is lower than the category average of 1.43%.
American Century Global Gold Investor (MUTF:BGEIX) seeks total return. BGEIX invests in securities of global companies whose operations are related to gold or other precious metals. BGEIX invests the lion's share of its assets in companies involved in processing, mining, fabricating and distributing gold or other precious metals.
BGEIX currently carries a Zacks Mutual Fund Rank #2 and has one-week and year-to-date returns of 10.1% and 5.9%, respectively. Annual expense ratio of 0.67% is significantly lower than the category average of 1.43%.
Franklin Gold and Precious Metals Advisor (MUTF:FGADX) invests the lion's share of its assets in securities of companies involved in operations related to gold and precious metals. FGADX invests in securities of companies located worldwide irrespective of their market capitalization. FGADX may also invest in Depositary Receipts.
FGADX currently carries a Zacks Mutual Fund Rank #2 and has one-week and year-to-date returns of 10.9% and 4.1%, respectively. Annual expense ratio of 0.84% is below the category average of 1.43%.