Fund Focus: More Uncertainty, Less Volatility

Uncertainty has bounded higher this week, but volatility hasn't. [Fund Focus Weekly - Winning Strategies for Mutual Funds Investors] [Fund Focus Weekly]( In This Issue [arrow] [This Week's Fund Focus](#L1) [arrow] [Vanguard Market Flash](#L2) [arrow] [Fidelity Fund Review: Select Biotechnology (FBIOX)](#L3) May 18, 2018 []This Week's Fund Focus It's been a week of abounding uncertainty, even if volatility has been subdued. Dan explains this apparent contradiction in this issue of Fund Focus Weekly before sharing his thoughts on the resurgence of small-cap stocks. Then, Jim writes about a fund with plenty of volatility: Select Biotechnology (FBIOX). There's potential for outsized returns with this fund for long-term investors, but be prepared for extreme drawdowns and wild swings. For the latest news on all things Vanguard and Fidelity as they happen, make sure to follow [Dan and Jeff]( and [Jim]( on Facebook. []Vanguard Market Flash: More Uncertainty, Less Volatility By Dan Wiener The Independent Adviser for Vanguard Investors As politically potent and optimistic as the news was last week, this week it appears things are falling apart again. North Korea's voluntary move to dismantle its nuclear testing facility was an easy gesture—meaningless, but calming to some. More importantly, the North Koreans are now upset over South Korean-U.S. joint wargames in the region and are saying that total disarmament is not in the cards for the proposed summit with President Trump. The art of this deal may be quickly turning to mush. Advertisement [The Independent Adviser for Vanguard Investors]( Meantime, the negotiations over a revised NAFTA appear to have hit an impasse, which means uncertainty will remain high not only in the Pacific Rim but also closer to home when it comes to trade policy with our neighbors. And to top this off, the President is now making overtures to help a failing Chinese tech company that was sanctioned by our own Commerce Department. While uncertainty has bounded higher, volatility apparently hasn't, at least when you consider the VIX, or "fear gauge." After spiking higher in early February, investors have apparently been taking chill pills for the past several weeks. Small stocks have set records the past couple of days, with the Russell 2000 index and the S&P SmallCap 600 index both hitting all-time highs Wednesday night. One theory is that with a slowdown overseas and lingering concerns over trade tariffs, the better bet is on companies that generate most, if not all, of their business domestically. Smaller companies, rather than global behemoths, fit that bill. SmallCap Index (NAESX) is up 4.8% for the year through Thursday, while 500 Index (VFINX) is up only 2.5%. The small-cap surge has only been in place for a little more than two months, though. At the end of February, relative fortunes were reversed, with SmallCap Index lagging 500 Index by more than three full percentage points. Now it's ahead by over two. The lesson in all of this is to stay diversified. Since no one rings a bell when momentum shifts from large to small, growth to value, or domestic to foreign, having all of those broad market segments in your portfolio is a winning strategy. This is particularly true when you can find great managers to do your individual stock-picking for you—[sign up to The Independent Adviser for Vanguard Investors for the names of Vanguard's best.]( []Fidelity Fund Review: Select Biotechnology (FBIOX) By Jim Lowell Jim Lowell's Fidelity Investor Healthcare is traditionally thought of as a defensive sector—as a group it has often held up well relative to cyclical sectors during market corrections and economic downturns. But the sector is not necessarily the defensive stalwart it once was. Controversy over the Affordable Care Act in recent years has shifted the investment landscape, and relative volatility has risen as a result. As a result, active trading among various subsectors (e.g., pharmaceuticals, medical equipment, biotech, HMOs, etc.) could add both risk-adjusted rewards and total return gains. However, unaccustomed, and thus unexpected, short-lived drops can happen in the healthcare sector; no subsector is immune to a Tweet about controlling drug prices, cost competition, and the relentless demand for innovative solutions. Those willing to live on the wild side could eke out greater returns by sitting in Select Biotechnology (FBIOX) for a period of at least 10 years. This fund's strategy invests in companies engaged in the research, development, and distribution of biotech­nology products and services. Manager Rajiv Kaul has run this fund since October 2005 and has returned 395.2% cumulatively for shareholders over that time. While this gain trounces the healthcare sector's return of 234.3% (as measured by the MSCI US IMI Health Care Index), it doesn't quite keep up with the biotech-specific MSCI US IMI Biotech Index's return of 468.8%. Not surprisingly, biotechnology stocks are the most volatile under healthcare's umbrella, but they can be rewarding for truly long-term investors who have the stomach for hair-raising losses. Case in point: From July 2015 to February 2016, it lost almost 37.8% while the S&P 500 was off just 4.9%. But with greater risk comes greater reward—over the past 10 years the fund has been the top-performing Fidelity Select fund, returning 14.8% per year. So before investing in this fund, make sure your heart is healthy enough for its above-average volatility and the potential for heart-pounding drawdowns. While some investors are comfortable (and healthy) enough to remain steadfast through those extreme declines, a more prudent approach is to keep your portfolio diversified. [Find out which Fidelity funds I recommend for a disciplined, diversified portfolio when you join Fidelity Investor today.]( Until next week, this is Fund Focus Weekly wishing you a safe, sound and prosperous investment future. Dan Wiener, Editor, The Independent Adviser for Vanguard Investors Jeff DeMaso, Co-Editor, The Independent Adviser for Vanguard Investors Jim Lowell, Editor, Jim Lowell's Fidelity Investor [Like Dan and Jeff on Facebook]( [Like Jim on Facebook]( To prevent this email newsletter from getting swept up by an overzealous spam filter, please add our "From" address (FundFocus@InvestorPlace.com) to your address book. Comments? Send us an email to feedback@investorplace.com. MANAGE YOUR ACCOUNT We hope this timely investing advice is valuable to you. Please tell us if your email has changed by writing us at service@adviseronline.com. To manage your email preferences or unsubscribe, click [here](. We will honor your request within 7–10 days. 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