Inflation rose more than expected in January, further denting the sentiment of investors already reeling under fears of the economy slowing down. Trade war fears have already unsettled markets and a sharp rise in inflation has now almost faded hopes of a rate cut anytime soon.
Given the uncertainty, it would be safe to invest in utility funds like American Century Utilities Inv BULIX, Fidelity Select Utilities FSUTX and Franklin Utilities Fund FKUTX.
Inflation Soars in January
The Labor Department reported last week that the consumer price index (CPI) jumped 0.5% sequentially in January after rising 0.4% in December. January’s rise is the highest since August 2023 and was sharply above analysts’ expectations of a rise of 0.3%.
Year over year, CPI rose 3% in January after climbing 2.9% in December, recording its biggest gain since April 2024. Core CPI, which excludes the volatile food and energy prices, rose 0.4% sequentially in January after increasing 0.2% in December.
Rising inflation has been a major concern for both consumers and the Federal Reserve, which has struggled to bring it down to its 2% target despite adopting a strict monetary tightening campaign that saw it increase interest rates by 525 basis points.
A day after the CPI report, the producer price index (PPI) reading reflected a similar picture. PPI increased 0.4% in January after rising 0.4% in December, higher than the consensus estimate of a rise of 0.3%. Year over year, PPI rose 3.5% in January after climbing by the same margin in the prior month.
Rate Cut Hopes Fade
With the CFPI and PPI data painting a gloomy picture, it is unlikely that the Federal Reserve will go for a rate cut anytime before the year's second half. The Federal Reserve cut interest rates by a total of 100 basis points on three consecutive occasions, beginning September 2024 after inflation started showing signs of cooling.
However, inflation started climbing again in the final months of 2024, which led the Federal Reserve to alert consumers that it would go for fewer interest rate cuts in 2024, which could be limited to a maximum of two. The central bank finally halted its easing cycle in January, leaving interest rates unchanged in its present range of 4.25-4.5%.
Given the sharp jump in inflation, the Fed is likely to maintain a cautious approach in the coming months. The year’s first rate cut, which, till a week ago, was expected in May, also appears unlikely.
Also, Trump’s tariff threats on multiple countries, including Canada and Mexico, have raised fears of a potential trade war among investors. This has been taking a toll on the broader market.
3 Best Choices
We've identified three utility mutual funds that have demonstrated impressive annualized returns over 3-year and 5-year periods. These funds also hold a Zacks Mutual Fund Rank of #1 (Strong Buy), require an initial investment of no more than $5,000 and have a low expense ratio.
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 (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
American Century Utilities Inv fund seeks current income and long-term capital growth. BULIX mainly invests 80% of its assets in stocks of companies engaged in the utilities industry. Within this 80% category, the managers will not buy shares of a company unless 50% or more of the company's revenues or net profits come from the ownership or operation of facilities used to provide electricity, natural gas, telecommunications services, cable television, water or sanitary services.
BULIX’s 3-year and 5-year annualized returns are 5.6% and 3.7%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.66%, which is lower than the category average of 0.96.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Fidelity Select Utilities fund seeks capital appreciation. FSUTX normally invests at least 80% of assets in common stocks of companies principally engaged in utilities and companies deriving the majority of their revenues from utility operations.
FSUTX’s 3-year and 5-year annualized returns are 12.1% and 8.9%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.67%, which is lower than its category average of 0.96%.
To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Franklin Utilities Fund fund seeks capital appreciation and current income. FKUTX invests at least 80% of its net assets in the securities of public utilities companies. Franklin Utilities Fund invests more than 25% of its total assets in companies operating in the utilities industry. The manager expects more than 50% of the fund's assets to be invested in electric utilities securities.
FKUTX’s 3-year and 5-year annualized returns are 8.4% and 6.3%, respectively. Franklin Utilities Fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.71%, which is lower that its category average of 0.95%.
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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