Best American Funds: Where To Invest Your Money

American Funds, a division of Capital Group, is one of the largest mutual fund firms in the world, with a history spanning over 90 years. With a diverse selection of funds and below-average expense ratios, American Funds offers attractive investment opportunities for long-term investors. In this discussion, we will delve into the world of American Funds, exploring the different types of mutual funds available, their investment strategies, and performance to help you make informed decisions about where to allocate your capital. From growth funds to target-date funds, we will analyse the key characteristics and advantages of each fund category to guide you in choosing the right American Funds for your investment portfolio.

Growth funds

Vanguard Growth ETF (VUG)

This ETF offers one of the most cost-effective ways to become a growth investor, with a cheap 0.04% expense ratio. It tracks the CRSP US Large Cap Growth Index, which holds a market-cap-weighted portfolio of 188 holdings screened for growth characteristics. The companies inside VUG exhibit a return on equity (ROE) of 42% and an earnings growth rate of 24.4%. However, the portfolio is not well-diversified, with a heavy focus on the technology sector.

Fidelity Blue Chip Growth Fund (FBGRX)

FBGRX is an actively managed growth fund that focuses on growth stocks with blue-chip status, defined by Fidelity as "well-known, well-established, and well-capitalized." It has outperformed its benchmark, the Russell 1000 Growth Index, over the trailing 10-, 5-, 3-, and 1-year periods. The fund charges a 0.47% expense ratio with no minimum required investment.

IShares Russell 1000 Growth ETF (IWF)

The Russell 1000 Growth Index is a market-capitalization-weighted benchmark that selects large- and mid-cap companies based on higher price-to-book ratios, medium-term forecasted growth, and historical growth in sales per share. The iShares Russell 1000 Growth ETF (IWF) provides an unbiased and objective way to identify companies with strong growth potential. It charges a 0.19% expense ratio and has a five-star rating from Morningstar.

Fidelity Contrafund (FCNTX)

FCNTX is a well-balanced growth fund that started as a contrarian-styled fund. Its current portfolio has a lower allocation to technology compared to the S&P 500, at 24.9%. Managed by William Danoff since 1990, FCNTX has consistently outperformed both the S&P 500 and the Morningstar "Large Growth" peer category. The fund charges a 0.39% expense ratio.

Invesco Nasdaq 100 ETF (QQQM)

QQQM provides access to the 100 largest non-financial companies listed on the Nasdaq exchange, which tends to include a higher number of innovative technology, consumer discretionary, and communication sector stocks. Its top holdings include Apple, Nvidia, Microsoft, Meta Platforms, Amazon, Tesla, and Alphabet. It charges a 0.15% expense ratio and is tax-efficient, with a low 0.6% 30-day SEC yield.

The Growth Fund of America (AGTHX)

The Growth Fund of America (AGTHX) takes a flexible approach to growth investing, seeking opportunities in traditional growth stocks, cyclical companies, and turnaround situations with significant growth potential. It has a diverse geographic focus, allowing portfolio managers to pursue opportunities outside the US. AGTHX has delivered strong performance, with a 5-year annualized total return of 16.19%, and it has lower fees compared to its peers.

Growth-and-income funds

When considering what American funds to invest in, it's important to keep in mind that any form of investment carries risk and you may lose money. It is always recommended to seek advice from a qualified financial advisor before investing.

Investment Objectives

The primary objective of growth-and-income funds is to provide investors with a combination of capital appreciation and income generation. These funds aim to achieve this balance by investing in a diversified portfolio of assets, including stocks and bonds, that offer growth potential and regular income through dividends or interest payments.

Types of Investments

Risk Considerations

While growth-and-income funds offer a more balanced approach compared to pure growth funds, they still carry risks. The value of investments in stocks and bonds can fluctuate due to various economic, political, and market factors. It is important for investors to carefully consider the risks associated with the fund, including the potential loss of capital.

Performance and Returns

When evaluating growth-and-income funds, it is essential to assess their historical performance and returns. Look at metrics such as average annual returns, five-year or ten-year annualized returns, and dividend yields. For example, the Investment Company of America fund (AIVSX) has an average annual return of 11.39% since its inception in 1934, outperforming the S&P 500's average annual return for the same period.

Expenses and Fees

In summary, growth-and-income funds offer investors the opportunity to achieve capital growth while also generating regular income. These funds provide a balanced approach by investing in a diversified portfolio of stocks, bonds, and other securities. When considering growth-and-income funds, it is crucial to assess the fund's investment objectives, historical performance, associated risks, and expenses. Remember to always consult with a financial professional and carefully review fund prospectuses before making any investment decisions.

Equity-income funds

JPMorgan Equity Income

This fund has a Morningstar Analyst Rating of Gold and is known for its cautious approach, making up ground in down markets. It had a 1.5% year-to-date gain, outperforming its large-value peers. Manager Clare Hart looks for dividend-paying stocks with consistent earnings, high returns on invested capital, conservative financials, and strong management teams.

T. Rowe Price Equity Income

Silver-rated by Morningstar, this fund is managed by John Linehan, who previously managed the T. Rowe Price Value fund. Linehan focuses on dividend-paying stocks with attractive valuations and is not averse to holding companies that cut or suspend dividends if their business outlook remains healthy. The fund gained 0.9% through the first 11 months of 2022.

Fidelity Equity-Income

Silver-rated Fidelity Equity-Income, managed by Ramona Persaud, aims for lower volatility and greater downside protection. Persaud targets inexpensive, well-positioned companies with strong free cash flow to support or increase dividend payments. The fund slid 1.4% in 2022, outperforming its large-value peer average and the Russell 3000 Value Index.

Vanguard Equity-Income

This fund is managed by Matthew Hand, who recently took over from longtime manager Michael Reckmeyer. Hand invests in 60-70 dividend-paying stocks, buying them when they are out of favour. The fund returned 3.8% year-to-date through November, ranking in the large-value category's top decile.

Neuberger Berman Equity Income

This fund employs a defensive approach, targeting companies with strong free cash flow generation and low leverage to cushion market volatility and mitigate downside risks. The team has an average of 30 years of experience and examines capital allocation priorities to identify dividend growth potential.

Balanced funds

One example of a balanced fund is the American Balanced Fund® Allocation, which allocates 50% to 70% of its portfolio to equities. This fund has been recognised by investment research firm Morningstar as one of the "great" mutual funds. As of November 2021, the American Balanced Fund had a 1-year return of 18.2%, a 3-year annualised return of 12.9%, a 5-year annualised return of 11.5%, and a 10-year annualised return of 10.9%. The fund's expense ratio is 0.58%, and it is ranked 31st among the top 401(k) funds.

The American Balanced Fund aims to be a complete portfolio for prudent investors by fine-tuning its blend of stocks and bonds to achieve three key goals: conserving capital, providing current income, and offering long-term growth. The fund typically holds blue-chip companies known for paying high dividends, such as Berkshire Hathaway and Royal Dutch Shell. It also invests in fast-growing companies like Activision Blizzard and ASML Holding. On the bond side, the fund primarily holds investment-grade bonds, with US Treasuries comprising 10% of its assets.

Another example of a balanced fund is the American Funds Target Date Retirement series, which is well-suited for investors who want an expert to manage their retirement investments. These target-date funds automatically adjust their asset allocation over time as investors approach their retirement. The American Funds target-date series stands out from others due to its glide path, holding more cash and maintaining a slightly more aggressive stock position. For instance, the American Funds 2040 Target Date Retirement fund allocates nearly 6% to cash, 84% to stocks, and 10% to bonds, while a typical 2040 target-date fund holds 2% in cash, 75% in stocks, and 13% in bonds.

Bond funds

Total Bond Market Index Funds:

These funds provide exposure to the entire bond market, including US Treasury bonds, agency bonds, corporate bonds, and other fixed-income investments. Some examples include:

• TIAA-CREF Bond Index Advisor (TBIAX)
• Northern Bond Index (NOBOX)
• Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)
• Schwab U.S. Aggregate Bond Index Fund (SWAGX)
• Fidelity Sustainability Bond Index Fund (FNDSX)

Intermediate-Term Bond Funds:

These funds invest in bonds with maturities between three and ten years, offering a balance between risk and return, suitable for investors with a medium-term investment horizon. Examples include:

• Vanguard Intermediate-Term Bond ETF (BIV)
• IShares Core Total USD Bond Market ETF (IUSB)
• IShares Core US Aggregate Bond ETF (AGG)
• Vanguard Intermediate-Term Corporate Bond Index/ETF (VICSX)

Short-Term Bond Funds:

These funds focus on bonds with shorter maturities, usually less than three years. They provide more stability and are less sensitive to interest rate changes. Examples include:

• Vanguard Short-Term Bond Index Fund ETF (BSV)
• IShares 0-3 Month Treasury Bond ETF (SGOV)
• Schwab Short-Term US Treasury ETF (SCHO)
• SPDR Portfolio Short-Term Treasury ETF (SPTS)
• Vanguard Short-Term Corporate Bond Index/ETF (VSTBX)

Long-Term Bond Funds:

Long-term bond funds invest in bonds with maturities of more than ten years. They are more sensitive to interest rate changes and may experience higher volatility but offer higher upside potential. Examples include:

• Vanguard Long-Term Bond ETF (BLV)
• Vanguard Long-Term Corporate Bond Index/ETF (VLTCX)
• American Funds The Bond Fund of America (ABNDX)
• Pimco Long Duration Total Return (PLRIX)

Municipal Bond Funds:

Municipal bond funds invest in bonds issued by state and local governments, often providing tax advantages. Examples include:

• American High-Income Municipal Bond (AMHIX)
• Vanguard Tax-Exempt Bond ETF (VTEB)
• T. Rowe Price Tax-Free High Yield (PRFHX)
• Fidelity Tax-Free Bond (FTABX)

It is important to consider your investment objectives, risk tolerance, and time horizon when selecting a bond fund. Additionally, factors such as duration, credit quality, and geography can impact the performance and risk profile of a bond fund.

Frequently asked questions