Inflation has started showing signs of easing but concerns over the economy’s health remain. The Federal Reserve feels that inflation needs to decline at a sharper pace, which has left it with no choice but to delay its planned rate cuts.
The month-over-month consumer price index reading remained unchanged in May after increasing 0.3% in April, the softest reading since July 2022.
However, year over year, CPI jumped 3.3%, which was slightly below the consensus estimate of a rise of 3.4%. The Federal Reserve left its benchmark policy rate unchanged in its June FOMC meeting in the current range of 5.25-5.5%.
The move was highly anticipated. However, Federal Reserve Chairman Jerome Powell, in his post-FOMC statement, said that the Fed sees only a single 25 basis point rate cut this year. This is sharply lower than the three rate cuts projected by the Fed in its March FOMC meeting.
The Federal Reserve hiked interest rates by 525 basis points since March 2022 to bring down 40-year-high inflation. The aggressive monetary tightening campaign saw inflation declining sharply in 2023, raising hopes that the Fed would soon start rate cuts.
Market participants were hopeful at the beginning of the year that the Fed could go for up to five rate cuts in 2024. However, the optimism soon started fading as inflation resumed its climb in the first quarter.
Even in early April, investors were pricing in three rate cuts this year but the Fed has now made clear that only a single rate cut of 25 basis points is likely this year. Moreover, the Federal Reserve hasn’t given any timeline for the rate cut although market participants are expecting it in September.
The uncertainty surrounding potential rate cuts could prolong market volatility. In such a situation, investing in utility mutual funds appears to be a wise choice. These funds offer essential stability and growth potential, making them a prudent consideration for savvy investors.
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).
Fidelity Select Utilities FSUTX 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 12.5% and 10.7%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.74%, which is lower than 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.
American Century Utilities Inv BULIX 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 4.8% and 5.5%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.66%, which is lower than 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.
Franklin Utilities Fund FKUTX 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 7.5% and 7.7%, respectively. Franklin Utilities Fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.71%, 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.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
