When you want to keep your money working in the U.S., one of your choices is a domestic stock fund. These funds focus most of their investing on American companies. Though they have that focus in common, there are many differences. Some invest only in large companies, while others seek out small or mid-sized companies. Another domestic fund might focus on American companies that pay dividends, which boosts your income. When you decide to invest in a domestic stock fund, consideration of all these issues helps in finding the fund that best suits your objectives.
Why Go American
Standard & Poor’s index of 500 stocks posted gains in the double digits in 2011 and 2012, reports MyDesert.com. In addition, American stocks began to attract foreign investors at the beginning of 2013. If this trend were to continue, domestic stocks could boost share prices of funds that specialize in U.S. equities. A domestic mutual fund gives investors diversity so that if any one stock fails, the others may do well and make up for it. This allows an investor to take advantage of a generally rising market while getting protection against a failing domestic company.
If you do put your money in domestic stock funds, you may find it useful to know that some funds that call themselves by this name actually invest up to 25 percent of their assets in foreign markets. Even if all companies in a fund are based in the U.S., they may still be international in scope. That means you could be invested in U.S. companies that are subject to business disruptions based on turmoil overseas, mounting foreign debt and unstable currencies.
Inflows and Outflows
"The New York Times” reported in December 2010 that money had been flowing out of U.S. domestic funds for four years in a row through 2010. By the beginning of 2012, the news agency Reuters reported that money had started flowing back into domestic funds in 2011. In other words, the flow seemed to have reversed in 2011 so that more money was flowing into funds after four years of flowing out. While this is no guarantee that such funds will do well going forward, it is an indication that many investors think they will.
Funds that invest in foreign companies are at a disadvantage if those companies do not issue dollar-denominated financial reports. If a foreign currency is strong against the dollar, U.S. investors could find that foreign profits are not worth as much in American dollars as they might have hoped. U.S. domestic funds measure companies’ profits in U.S. dollars. This makes it simple for American investors to measure their gains. Of course, if a foreign currency is weak against the dollar, investors in foreign funds will benefit from a favorable exchange rate, and investors in U.S. domestic funds will miss out on that advantage.
Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.