Utilities is currently among the best performing sectors in the United States, with the Utilities Select Sector SPDR (XLU) advancing almost 4.6% this year till May and jumping nearly 4.3% last month. Usually, rising interest rates in an inflationary economy can be bad news for the utilities sector, but we are living in unconventional times.
Markets have been volatile of late, with the economy reeling under inflation. Investors, too, are apprehensive about the measures that the Federal Reserve has been taking to tackle the same. With rising fear that the hawkish stance taken by the Fed might send the economy into an impending recession, investors are running for cover. This is where utility stocks come in, as they have a reputation for being safe, solid defensive instruments to invest in a volatile market. In reality, they are non-cyclical in nature and ensure an almost guaranteed stream of income in the face of market vagaries.
One has to keep in mind that demand for electricity, gas, water, communications etc., usually does not take a major hit even in market downturns because of their basic need-based nature. So, these low-risk and moderate-reward buckets often look lucrative when investors are looking to safeguard their portfolios. But these are not dead weights on the portfolio, even when markets are on an upswing. They may have low beta and may not grow as fast as the market but will certainly take advantage of the upswing as demand for their products shows no imminent signs of slowing down.
Hence, astute investors should invest in mutual funds at present, with utility companies as their major holdings. 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 such mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000 and carry a low expense ratio.
PGIM Jennison Utility Fund- Class Z ( PRUZX Quick Quote PRUZX - Free Report) invests the majority of its net assets in equity and investment-grade debt securities issued by utility companies. PRUZX, a non-diversified fund, also ensures that it borrows money for non-investment purposes to meet anticipated redemptions.
Ubong Edemeka has been the lead manager of PRUZX since Mar 30, 2005, and most of the fund’s exposure is to the utilities sector. Three major holdings for the fund are 10% in Nextera Energy, 4.9% in Centerpoint Energy and 4.3% in Dominion Energy.
PRUZX’s 3-year and 5-year annualized returns are 12.1% and 10.5%, respectively. Its net expense ratio is 0.56% compared to the category average of 0.94%. PRUZX has a Zacks Mutual Fund Rank #1.To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds,
please click here. Franklin Utilities Fund ( FRUAX Quick Quote FRUAX - Free Report) invests the majority of its net assets in the securities of public utilities companies like electricity, natural gas, water, and communications services. FRUAX invests primarily in equity securities, which consist mainly of common stocks.
John Kohli has been the lead manager of FRUAX since Dec 30, 1998, and most of the fund’s exposure is to the utilities sector. Three top holdings for the fund are 11.7% in Nextera Energy, 4.8% in CMS Energy and 4.6% in Dominion Energy.
FRUAX’s 3-year and 5-year annualized returns are 11.4% and 10%, respectively. Its net expense ratio is 0.58% compared to the category average of 0.94%. FRUAX has a Zacks Mutual Fund Rank #1.
Fidelity Select Utilities Portfolio ( FSUTX Quick Quote FSUTX - Free Report) invests the majority of its investable assets in equity and equity-related securities of companies principally engaged in the utilities industry or deriving a majority of their revenues from their utility operations. FSUTX, a non-diversified fund, uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions to select investments.
Douglas Simmons has been the lead manager of FSUTX since Oct 1, 2006, and most of the fund’s exposure is to the utilities sector. Three major holdings for the fund are 16.5% in Nextera Energy, 7.8% in Sempra Energy, and 7.9% in Exelon.
FSUTX’s 3-year and 5-year annualized returns are 12% and 11.7%, respectively. Its net expense ratio is 0.73% compared to the category average of 0.94%. FSUTX has a Zacks Mutual Fund Rank #1.
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