3 safer moves in a risky market

By Tim Middleton

As muddled as Washington has been on the debt-rescue plan, the economy has been whirled around even more. Damaged stocks are being ejected from this maelstrom like fiery asteroids as the recession is made deeper and lengthier, savaging their earnings' prospects.

But three distinct types of mutual and exchange-traded funds are either resisting this whirlwind or benefiting from it. One group in particular has appeal because it allows tax-loss harvesting on a grand scale. The two others have special attractions as well.

Any investor can benefit from choosing one path, and many will want to embrace all three.

Consumer staples resist any recession, long or short, and solid investment options exist even in many corporate 401(k) plans. The value style of investing is triumphing, allowing us to slough off the growth funds that have been so successful until recently, probably finding considerable tax savings in the process. And for the income portion of your portfolio, corporate bonds have become magnetic.

Here's how to use these funds to maximize their impact on your kitty.

Consumer staples

These products are the household names you buy week in and week out, and they are a traditional refuge in tough markets for other stocks. Names like Procter & Gamble (PG, news, msgs), Coca-Cola (KO, news, msgs) and Kraft Foods (KFT, news, msgs) feed an ever-expanding demand for the building blocks of today's lifestyle.

Fidelity Select Consumer Staples (FDFAX) is a granddaddy of this specialty, having been around for more than 20 years and always ranking in the top tier of such funds. Fidelity is also the largest operator of 401(k) plans. The top holdings are P&G, Coca-Cola, PepsiCo (PEP, news, msgs), CVS Caremark (CVS, news, msgs) and Nestle SA (NSRGY, news, msgs).

The fund is beating the market by 10 percentage points this year (meaning it's down slightly less than 10%), and it has averaged outperformance of nearly 7 points over each of the past five years. In the chaotic week ended Oct. 1, when the overall market was down, this fund moved ahead 1.2%.

Among ETFs, the choice here is Select Sector SPDR Consumer Staples (XLP, news, msgs). Like virtually all ETFs, this is an index fund, in this case tracking consumer stocks in the S&P 500 ($INX). The top five holdings are P&G, Wal-Mart Stores (WMT, news, msgs), Philip Morris International (PM, news, msgs), Coca-Cola and PepsiCo.

• Video: How to diversify your portfolio

Interestingly, despite heavy overlap with the Fidelity portfolio, this fund has performed much better of late, perking up 2.5% in the past week and off just 1.9% this year. This performance difference points up a fundamental split in the design of the two portfolios. Fidelity has nearly a quarter of its assets in foreign stocks, the Spider virtually none. With the dollar rallying, the ETF's purely domestic focus has been an asset.

Value funds

Funds in the value segment have taken a whipping in the past couple of years. But they are showing signs of fresh life, and in taxable accounts the timing couldn't be better. With everything underwater this year, you can sell the defensive growth funds that have given you a bit of protection against the worst of the bear market and swap into value funds, taking losses you can deduct from your taxes while actually improving performance over coming years.

The capital losses on those growth funds can be used to offset any gains you've booked during the year. Or, more likely, they can be carried forward and used as deductions to future years, when you will have capital gains.

Vanguard funds are the most straightforward in the industry, many clearly labeled to identify their style, so making switches like this is particularly easy. To take one example, you could sell Vanguard U.S. Growth (VWUSX), which is down a miserable 21% this year, and buy Vanguard Windsor (VWNDX), a large value fund.

It is down an even more wretched 25.7% this year, but that's because of blunders by a since-replaced co-manager. Meanwhile, you capture a loss for tax purposes.

You don't have to be a Vanguard customer to make switches like this. Every large fund company offers both growth and value funds, covering small as well as large companies.

Continued: ETF investors have it easy

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