Stocks retreated on Aug 2, with all three major indexes ending in the red after Fitch Ratings downgraded the U.S. long-term foreign currency issuer default rating to AA+ from AAA, citing “expected fiscal deterioration over the next three years.” This comes after the agency placed the country’s AAA rating in the negative watchlist.
Following the downgrade, the Dow, the S&P 500 and the Nasdaq finished 1%, 1.4% and 2.2 lower, respectively. In fact, markets have remained volatile almost throughout May and June. The scenario started changing in July as markets rallied after positive economic data suggested a steady decline in inflation, which raised hopes that the Fed could soon end its monetary tightening cycle.
However, concerns about an economic slowdown flared up again after the Fed increased interest rates by 25 basis points on Jul 26 and remained open for more hikes depending on economic data.
Given this situation, it would thus be wise to invest in defensive funds like utilities such as Fidelity Advisor Utilities Fund FUGAX, Fidelity Select Utilities Growth Portfolio FSUTX and Franklin Utilities Fund Class A1 FKUTX.
Concerns About the Economy’s Health Grows
The Fed raised interest rates by 500 basis points for the 10th straight time since March 2022 before pausing in June. However, it again raised rates in July and hinted at more hikes if required.
This comes despite data showing that inflation has eased over the past year. The Consumer Price Index (CPI) fell to 3% in June after a 4% rise in May. CPI has fallen sharply over the past 12 months after peaking to 9.1% in June 2022.
Also, Personal Consumption Expenditures (PCE) inflation and the core PCE inflation increased 2.6% and 3.8%, respectively, in the second quarter. This is considerably low compared to an increase of 4.1% for PCE and 4.9% for core PCE in the first quarter.
The headline PCE inflation rose just 3% year over year in June, hitting its lowest level since March 2021. Moreover, U.S. GDP grew 2.4% in the second quarter, following a rise of 2% in the first quarter.
However, the Fed said that inflation is still elevated and a lot higher than its 2% target. Thus, uncertainty looms large on the markets given that the Fed could go for more interest rate hikes. Higher interest rates will make borrowing expensive and raise concerns over the economy slipping into a recession.
At this juncture, it would be wise to consider investing in utility funds. The utilities sector is fundamentally stable and mature since the demand for its services tends to remain steady regardless of economic fluctuations. These companies offer essential services such as telecommunications, energy, gas and water, which are consistently in demand.
Including companies from the utility sector in a portfolio enhances its resilience to withstand market turbulence. Moreover, the utilities sector is known for its consistent and transparent profitability and cash flows, making it a reliable choice for investors.
3 Best Choices
We have selected three mutual funds with significant exposure to the utilities sector. The funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and are poised to gain from the above factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors in identifying potential winners and losers. Unlike most fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds.
Fidelity Advisor Utilities Fund aims for capital appreciation. FUGAX invests the lion’s share of assets in common stocks of companies principally engaged in the utilities industry as well as those companies that derive a majority of their revenues from their utility operations.
Fidelity Advisor Utilities Fund Class A fund has a history of positive total returns for more than 10 years. Specifically, FUGAX has returned nearly 11.4% and 7.7% over the past three and five-year periods, respectively. Fidelity Advisor Utilities Fund Fund has a Zacks Mutual Fund Rank #2 (Buy).
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Fidelity Select Utilities Growth Portfolio fund seeks capital appreciation by investing most of its net assets in securities of domestic and foreign companies engaged in utility business and earning the majority of their revenues from utility operations. FSUTX advisors use a fundamental approach like financial condition, industry position, as well as market and economic conditions to select investments.
Fidelity Select Utilities Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSUTX has returned nearly 11.8% and 8.3% over the past three and five-year periods, respectively. Fidelity Select Utilities Portfolio fund has a Zacks Mutual Fund Rank #1 (Strong Buy).
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Franklin Utilities Fund Class A1 invests most of its net assets in equity securities of public utility companies that provide electricity, natural gas, water and communications services to the public and companies that provide services to public utility companies. FKUTX advisors also invest a relatively small portion of their assets in companies operating in the utility industry.
Franklin Utilities Fund Class A1has a history of positive total returns for more than 10 years. Specifically, FKUTX has returned nearly 8.7% and 8% over the past three and five-year periods, respectively. Franklin Utilities Fund Class A1has a Zacks Mutual Fund Rank #1.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
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