Data released recently shows that investors are now preferring domestic equity funds over global stock funds. As per Lipper data, domestic equity funds have posted strong gains to date this year in contrast to a decline registered in the first two months of last year. Additionally, U.S. stock funds registered better returns last month compared to their international counterparts.
Moreover, Trump's economic policies, indications from the Fed about an imminent rate hike and an encouraging earnings season are expected to attract investors toward U.S. stock funds for a considerable time. Following these recent gains, the addition of domestic equity mutual funds to one's portfolio might prove to be one of the most suitable investment options at this point in time.
U.S. Stock Funds Rally Upward
U.S. stock funds saw a strong start to this year as compared with 2016. According to Lipper data, domestic equity funds fell around 6.4% in the first two months of 2016, but are up around 4.6% so far this year. U.S. equity funds not only saw gains in the first two months, but also continued this rally into the month of February.
Additionally, domestic stock funds generated returns of 2.7% in February, considerably better than an increase of 1.2% registered by international stock funds. U.S. stock funds also outpaced the performance of bond funds, which rose around 0.7% last month.
Factors Contributed to This Rally
Trump adopted a more "presidential" tone in his speech before a joint Congress session, charging up investors. In his speech, Trump focused on introducing a "historic" tax reform and a "massive" infrastructure plan, which, along with his soothing tone boosted investor sentiment. Additionally, optimism over Trump's proposed market-friendly policies including tax cuts, job creations, financial de-regulation and increase in infrastructure spending benefited domestic equity markets.
Additionally, Fed Chair Janet Yellen indicated that a rate hike this month "would likely be appropriate." She added that more rate hikes are slated to follow later this year, reflecting renewed strength in the job market and a bump up in inflation.
On the earnings front, we have seen fourth-quarter results from 484 S&P 500 members or 98.7% of the index's total membership. Total earnings for these 484 index members are up 7.4% on 4.9% higher revenues, with 68.4% beating EPS estimates and 54.1% coming ahead of top-line expectations. The proportion of companies beating both EPS and revenue estimates is 40.3%.
Buy These 5 Best Performing U.S. Stocks Funds
Here, we have selected five mutual funds which have more than 80% exposure in U.S. equity markets and sport a Zacks Mutual Fund Rank #1 (Strong Buy). These funds also have impressive one-month and three-month returns. Also, these funds have a low expense ratio and their minimum initial investment is within $5000.
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.
DFA Tax-Managed US Small Cap (DFTSX) invests a bulk of its assets in equity securities of small-cap domestic companies. DFTSX seeks appreciation of capital for the long run as well as a reduction in the impact of federal income taxes on returns.
DFTSX has an annual expense ratio of 0.52%, which is below the category average of 1.22%. The fund has one-month and three-month returns of 0.8% and 4.9%, respectively. The fund allocates more than 99% of its assets in U.S. stocks.
T. Rowe Price QM US Small-Cap Growth Equity (PRDSX) invests the lion's share of its assets in securities of growth-oriented companies with small size market capitalization. PRDSX seeks appreciation of capital for the long run.
PRDSX has an annual expense ratio of 0.81%, which is below the category average of 1.31%. The fund has one-month and three-month returns of 2.4% and 8.1%, respectively. The fund allocates around 93% of its assets in U.S. stocks.
Vanguard Value Index Investor (VIVAX) invests nearly all its assets in stocks of companies which are included on the CRSP US Large Cap Value Index. VIVAX seeks to replicate the performance of the index by investing a proportion of its assets in each stock as its weighting on the index.
VIVAX has an annual expense ratio of 0.18%, which is below the category average of 1.09%. The fund has one-month and three-month returns of 3.7% and 7.6%, respectively. The fund allocates nearly 99% of its assets in U.S. stocks.
Fidelity Growth & Income (FGIKX) invests its assets heavily in equity securities of those companies that have high capital growth potential and dividend-paying abilities. FGIKX invests not only in common stocks but also in bonds.
FGIKX has an annual expense ratio of 0.52%, which is below the category average of 1.03%. The fund has one-month and three-month returns of 3.3% and 7.5%, respectively. The fund allocates above 89% of its assets in U.S. stocks.
DFA US Targeted Value R2 (DFTPX) invests a diverse and wide variety of common stocks of domestic small- and mid-cap companies which are expected to be value stocks. DFTPX seeks growth of capital for the long run.
DFTPX has an annual expense ratio of 0.62%, which is below the category average of 1.30%. The fund has one-month and three-month returns of 0.3% and 4.4%, respectively. The fund allocates more than 95% of its assets in U.S. stocks.
