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Grab These 3 Financial Mutual Funds As Rate Hikes Continue

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In a desperate bid to control the inflationary levels not seen in decades, the Federal Reserve has been raising rates since March. Fed officials have continued to raise rates in their meetings, from 25 to 75 basis points, as inflation has not eased off. In the Fed September Federal Open Market Committee meet, a third consecutive 75 bps hike was announced to elevate rates to a target range of 3 to 3.25%, while indicating that the market may expect a similar hike from the next meeting as well.

Fed projections show that it expects to raise the policy rate to 4.4% by the end of this year and to 4.6% by the end of next year. Inflation is expected to be 5.4% in the last quarter of this year before coming down to 2.8% in the final quarter of next year.

By the end of 2024, policymakers see inflation at 2.3%, which is likely to ease to its 2% target by the end of 2025. However, to bring inflation down to its target level, there would be severe pressure on the job market and the housing market would need a correction, as was made clear by Fed Chair Jerome Powell.

“Without price stability, the economy does not work for anyone,” said Powell. “In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.” So, it will be safe to surmise that in its crusade to bring down inflation, the Fed will continue to hike rates in the foreseeable future.

When interest rates go up, the banking sector and other financial institutions that have cash holdings from customers and other business activities see higher profitability due to increased lending rates. In fact, the spread between such lending rates considered to be long-term assets for banks, and short-term liabilities such as deposits increases, thereby boosting net interest margins. Stocks of banks, insurance companies, and other financial institutions rise in periods of sustained interest rate hikes.

In summary, financial mutual funds provide the 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) or 2 (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.

Fidelity Advisor Financial Services Fund (FFSIX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stock issued by companies engaged in providing financial services to consumers and industry. FFSIX uses fundamental analysis of factors such as financial condition and industry position, as well as market and economic conditions to decide its investments.

Matt Reed has been the lead manager of FFSIX since May 31, 2019, and 85.4% of the fund is invested in the financial sector. Three top holdings for FFSIX are 5% in Wells Fargo, 5% in Bank of America and 4% in M&T Bank.

FFSIX’s 3-year and 5-year annualized returns are 11.2% and 9.2%, respectively. Its net expense ratio is 0.75% compared to the category average of 1.08%. FFSIX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Davis Financial Fund (RPFGX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stocks issued by companies engaged in the financial services sector using the Davis Investment Discipline. The fund offers dividends and capital gains annually.

Christopher Davis has been the lead manager of RPFGX since Dec 31, 2013, and 86.3% of the fund is invested in the financial sector. Three top holdings for RPFGX are 8.1% in Capital One Financial, 6.8% in Chubb Limited and 6.6% in Berkshire Hathaway.

RPFGX’s 3-year and 5-year annualized returns are 7.3% and 5.3%, respectively. Its net expense ratio is 0.95% compared to the category average of 1.08%. RPFGX has a Zacks Mutual Fund Rank #2.

Fidelity Select Brokerage & Invmt Mgmt Portfolio (FSLBX - Free Report) invests the majority of its assets in common stocks of companies principally engaged in the exchange of financial instruments, stock brokerage, commodity brokerage, investment banking, tax-advantaged investment or investment sales, investment management, or related investment advisory and financial decision support services. FSLBX offers dividends and capital gains twice a year in April and December.

Charlie Ackerman has been the lead manager of FSLBX since Oct 31, 2018, and 88.2% of the fund is invested in the financial sector. Three top holdings for FSLBX are 5.9% in S&P Global, 5.6% in Morgan Stanley and 5.6% in BlackRock.

FSLBX’s 3-year and 5-year annualized returns are 16.5% and 12.4%, respectively. Its net expense ratio is 0.74% compared to the category average of 1.08%. FSLBX has a Zacks Mutual Fund Rank #2.

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