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Fed Rate Hike on the Table Again: 5 Finance Mutual Fund Picks

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The Federal Reserve had raised interest rates for the first time in almost a decade in December and assured that it would hike rates four times this year provided there are signs of a strengthening labor market, inflation rises to the target level of 2% and financial markets remain strong. However, the continuous slump in oil prices, weak global economy and volatile financial markets since the beginning of the year raised doubts whether the Fed will be able to fulfill its commitment.

Nevertheless, Friday’s upbeat jobs report reinforced the notion that the labor market is firming, which puts Fed rate hikes in play. An uptick in inflation data and rise in consumer spending levels also kept rate hikes in the cards. Additionally, the broader markets regained momentum in the last three weeks after a rebound in oil prices from its 12-year low ebbed deflationary concerns. China’s stimulus measures, on the other hand, raised hopes of a much stable global economy which would in turn contain the volatility in the broader markets.

While these encouraging facts aren’t probably enough to push the central bank to raise rates this month, it could bolster the case for a rate hike in the upcoming meetings this year. A large number of economists and some Fed officials also expect the central bank to continue hiking rates this year. Given these positive vibes, it is profitable to invest in financial mutual funds that are positioned to benefit from subsequent lift-offs. These funds also boast strong fundamentals and solid returns.

Upbeat Jobs Data

The jobs data painted a solid picture of the labor market. The U.S. economy added 242,000 jobs in February, handily beating the consensus estimate of 194,000, according to the Bureau of Labor Statistics (BLS). The tally was also considerably higher than January’s upwardly revised job number of 172,000.

Meanwhile, the unemployment rate in February remained unchanged at 4.9%. Further, the unsparing U-6 rate that includes the unemployed, the underemployed and the discouraged dipped to 9.7% in February from 9.9% in January, its lowest level since May 2008.

The labor force participation rate also increased to 62.9% last month, the highest level in almost a year. Moreover, the report found that wages went up 2.2% in the past 12 months. Even though it increased at a slower pace compared to the previous month, it is still consistent with a tightening labor market that is viewed by the Fed as one of the major criteria for a rate hike.

Underlying Inflation Picks Up, Spending Rises

This surge in hiring followed the Commerce Department’s report that showed a rise in inflation. The Fed’s preferred gauge, the personal consumption expenditures index (PCE), increased 1.3% in January from year-ago levels. The so-called “core” inflation that excludes food and energy prices came in at a solid 1.7%, much closer to the Fed’s desired target.

Moreover, consumer spending levels increased at the fastest pace in eight months this January. Retail sales are also off to a good start this year, indicating strength in consumer spending which accounts for more than two-thirds of U.S. economic activity. These reports increase the likelihood of a rate hike soon.

Broader Markets Rally

Markets have also showed signs of stability in recent times. Oil prices bounced back from its record low in mid-February, which eventually boosted the broader markets. Signs of decline in U.S. production and continuous talk about freezing output by the major oil producers were cited to be the reasons behind the oil price surge.

Positive developments in China also fueled investors’ sentiment. The recent stimulus measures by the People’s Bank of China (“PBOC”) to address concerns over the country’s recent economic slowdown boosted investor sentiment. The PBOC reduced the reserve requirement ratio by 0.5% to 17%.

5 Finance Mutual Funds to Invest In

If the broader markets continue their winning streak, the Fed will have to raise rates this year. Additionally, a pick-up in the inflation rate, rise in consumer spending levels and encouraging nonfarm payroll reports are also paving the way for a rate hike as early as possible.

Fed Vice Chairman Stanley Fischer had already told the National Association for Business Economics on Monday that inflation may be “stirring,” which suggests that he might want rates to increase in the near future. Richmond Fed President Jeffrey Lacker had also said that ongoing strength in the labor market warrants rate hikes this year.

A survey by the National Association for Business Economics on Monday showed that almost 80% of economists expect a Fed rate hike this year at least once. The CME Group's FedWatch tool expects there is a solid 53% chance that hike could come as soon as November, while it projects that there is almost a 50% chance of a rate hike in September. Separately, the Bank of America Merrill Lynch Global Research stated last Friday that Americans can witness two interest rate hikes this year and three more next year.

Given that there is a fair chance of a rate hike this year, it will be prudent to invest in finance mutual funds. Financial companies including banks, insurers and brokerage firms are likely to be one of the biggest beneficiaries of the rate hike.

Here we have selected five such finance funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive 3-year and 5-year annualized returns, offer minimum initial investment within $5000 and carry a low expense ratio.

JHancock Regional Bank A (FRBAX - Free Report) invests a large portion of its assets in equity securities of regional banks. FRBAX’s 3-year and 5-year annualized returns are 12.1% and 10.1%, respectively. Annual expense ratio of 1.26% is lower than the category average of 1.54%. FRBAX has a Zacks Mutual Fund Rank #1.

Fidelity Select Banking (FSRBX - Free Report) invests a major portion of its assets in securities of companies principally engaged in banking. FSRBX’s 3-year and 5-year annualized returns are 8.7% and 7.9%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.54%. FSRBX has a Zacks Mutual Fund Rank #2.

Schwab Financial Services invests the majority of its assets in equity securities issued by companies in the financial services sector that includes commercial banks, insurance and brokerage companies. SWFFX’s 3-year and 5-year annualized returns are 7.8% and 7.1%, respectively. Annual expense ratio of 0.9% is lower than the category average of 1.54%. SWFFX has a Zacks Mutual Fund Rank #1.

Fidelity Select Insurance Portfolio (FSPCX - Free Report) invests a large portion of its assets in securities of companies principally engaged in property, life or health insurance. FSPCX’s 3-year and 5-year annualized returns are 12.8% and 11.4%, respectively. Annual expense ratio of 0.81% is lower than the category average of 1.54%. FSPCX has a Zacks Mutual Fund Rank #1.

Franklin Mutual Financial Services A (TFSIX - Free Report) invests a major portion of its assets in securities of financial services companies. TFSIX’s 3-year and 5-year annualized returns are 8.9% and 7.4%, respectively. Annual expense ratio of 1.44% is lower than the category average of 1.54%. TFSIX has a Zacks Mutual Fund Rank #1.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.



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