Domestic Stock Fund Overview
Domestic stock funds offer all of the standard benefits that come with any type of mutual fund, such as broad diversification, professional management and liquidity that is packaged into a convenient vehicle that makes it accessible to even the smallest investors. Some funds invest in companies of a specific size, such as small, mid or large cap while others focus on a single sector in the economy, such as technology, utilities or healthcare. Some funds also seek more specialized corporate issues such as preferred stocks or convertible bonds that can be traded in for a specific number of company shares.
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Domestic stock funds can also have several different investment objectives, such as capital growth, income or some combination thereof. Some funds also seek to achieve one or more of these objectives (usually growth) in a tax-efficient manner. These funds can be held either inside or outside of an IRA or employer-sponsored qualified plan, and many of them are also offered as subaccount options in variable annuity contracts.
Home Country Bias
Of course, this bias is not always rational; most asset managers strongly recommend that investors keep a portion of their holdings in foreign companies in order to provide additional diversification and reduce their overall risk. Most domestic stocks funds will move at least somewhat in unison during periods of strong market movement in either direction, although the severity of their reaction does of course differ depending upon the type of fund.
But research is beginning to show that global investing does not provide quite the same level of diversification that it once did, because many foreign markets have matured to the point that they now move much more in tandem with the U.S. indices. Investors seeking foreign holdings that fall outside this category have therefore begun to seek opportunities in the frontier markets, which exposes them to considerably higher political risk and substantial volatility.
Nevertheless, overseas holdings can still do very well when domestic markets are down, and those who overlook this area can miss out on valuable opportunities. But fear of the unknown often prevents investors from venturing outside their borders, and this bias can ultimately lead to lower returns with greater overall risk.
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Unfortunately, qualified dividends are no longer eligible for capital gains treatment, so all dividends of any kind are now taxed as ordinary income. But shareholders of domestic stock funds will not have to worry about reporting foreign dividends or gains of any kind.
Examples of Domestic Stock Funds
- Vanguard S&P 500 Index VFINX – This fund purchases all of the stocks in the Standard & Poor’s 500 Index and charges one of the lowest expense ratios in the industry. Thousands of investors who wish to simply purchase the market have accomplished their objective with this fund.
- Fidelity Mid-Cap Value Fund (FSMVX) – This fund seeks to provide capital appreciation by investing in stocks of companies with a middle capitalization rating that the managers feel are currently trading below their real value. Morningstar has assigned this fund a five-star rating as of 09/30/2014.
- T. Rowe Price Equity Income Fund PRFDX – This fund seeks to provide a stream of income superior to that of guaranteed instruments like CDs or Treasury securities by purchasing equities that produce above-average dividend income. Long-term capital growth is a secondary objective. Morningstar has assigned a 3-star rating to this fund as of 9/30/2014.
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