Zacks
3 Financial Mutual Funds to Buy With More Rate Hikes in the Cards
Zacks Equity Research
4 min read

The Federal Reserve started raising interest rates in March 2022 to combat four-decade-high inflation and continued on the path for 10 straight policy meetings. Earlier this month, however, in its FOMC meeting, the central bank opted for a rate-hike pause, bringing much relief to investors and the market in general.

Economic indicators from various sectors were suggesting that the Fed’s tight monetary policy decisions were taking effect. Inflation numbers were also suggesting a gradual slowdown. The Fed had finally taken cognizance.

However, the cheer was short-lived. The rate-hike pause came with a stern warning from Fed officials that shortly, they might have to revert to policy tightening. This is because inflation, albeit down from historic levels, is still above the Fed’s target rate of 2%. In his deposition given to a Congressional Committee, Fed Chair Jerome Powell suggested that he was fairly certain of at least two more rate hikes this year, which would raise rates by another 50 bps. Currently, it rests in the range of 5-5.25%.

It is looking increasingly likely that we have not yet reached the end of the rate-hike cycle. As an immediate aftermath of the pause, there was a general notion that rates would not be raised in the July meeting either. However, after Powell and other Fed officials turned hawkish, odds are that rates would go up in July itself.

When interest rates continue to go up, banks and other financial institutions generally see higher profitability due to increased lending rates. The gap between such lending rates is considered a long-term asset for banks. Also, short-term liabilities such as deposits increase and boost net interest margins. Stocks of banks, insurance companies, and other financial institutions go up with continuous interest rate hikes.

For the same reason, financial mutual funds provide much-required growth in a market where interest rate hikes are expected to continue. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

We have thus selected three financial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), have positive three-year and five-year annualized returns, and minimum initial investments within $5000 as well as carry a low expense ratio. We have also made sure that at least 80% of the fund is invested in the financial sector.

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