News Column

5 takeaways for fund investors

July 1, 2014

By John Waggoner, USA TODAY

This year is no 2013, but fund investors have had a solid start to 2014. Five important takeaways:

1True contrarians didn't buy stocks this year.

They bought long-term bond funds, which rose 12.5% in the first half, trouncing the Standard and Poor's 500-stock index, up 7.1%. Bond prices rise when interest rates fall, and no one expected rates to fall this year. The 10-year Treasury note started the year at 3.03% and finished the first half at 2.52%.

2Gold glittered, but gold-mining stocks dazzled.

Funds that invest in gold-mining stocks have soared 27.5% this year, vs. 9.3% for funds that invest directly in the precious metal. And that makes sense. Consider a company that gets gold out of the ground for $1,000 an ounce. If gold sells for $1,200 an ounce, the company's gross profit is $200. If gold rises to $1,300 an ounce -- an 8.3% gain -- the gold-mining company's profit rises to $300, a 50% gain.

3Sending your money abroad made your portfolio worldly but not hot.

Thinking the U.S. market overvalued, investors have put just $2.6 billion into domestic U.S. stock funds this year but $55.2 billion into international funds, says the Investment Company Institute. How has that worked out?

The S&P 500 has gained 7.1% this year, including dividends. International funds, by and large, have lagged. For example, international large-cap core funds: up 3.8%, vs. U.S. large-cap core funds' gain of 6.4%, according to preliminary Morningstar data.

4Most of the top-performing sectors this year will get clobbered when rates rise.

Utilities funds, normally mild-mannered funds that are usually reserved for conservative investors who want income, have soared 15.8% this year. Others: real estate, up 16.5%, energy limited partnerships, up 17.2%.

When interest rates are this low, any investment that acts like a bond and offers a bit of yield looks attractive. The problem: When interest rates rise again, these sectors will get clobbered. A 3% yield on a stock is much less appealing when you can the same yield with less risk from a bond or even a bank CD.

5You shouldn't invest in most of 2014's top funds.

The funds with stratospheric 2014 records will likely be those that use futures and options to double -- or triple -- gains and losses. These have no place in the average portfolio. For example, the top performer is Direxion Daily Junior Gold Miners Index Bull 3x shares, up 75.2% this year.

The fund's share price rises and falls three times more each day than the underlying index. How bad could it be? Look at its mirror image, the Direxion Daily Junior Gold Miners Index Bear 3x shares, down nearly 80%.

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Source: USA Today

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