Markets got a significant boost this Wednesday following the conclusion of the Federal Open Market Committee (FOMC) two-day policy meeting, as the key interest rate remained unchanged. FOMC decided to keep the interest rate flat between 0.25% and 0.50% and raise the rate twice this year, compared with its earlier forecast of four hikes. Regarding the rate hike decision, the Fed Chair Janet Yellen said: “Proceeding cautiously in removing policy accommodation at this time will allow us to verify that the labor market is continuing to strengthen despite the risks from abroad.”
Unchanged interest rate and reduction of forecast regarding the number of rate hikes this year may have a positive impact on mutual funds related to utility, real estate and gold, which are considered as major beneficiaries of a low rate environment. Meanwhile, improving investor sentiment brought on by the oil price rally and a recovering U.S. economy helped U.S. based equity funds to register inflows during the week ending Mar 9, for the first time this year.
Fundamentally strong mutual funds from sectors believed to benefit from steady rates in the near term will make for prudent investment choices. Before delving into the funds, let’s focus on the key takeaways of FOMC policy statements and Yellen’s views on the same.
Conclusions from FOMC Meeting
In tandem with keeping the interest rate unchanged and reducing the number of rate hikes, FOMC also cut the high end of the interest rate band for the year. It now expects the upper level to approach 0.9%, compared with 1.4% projected in December. The committee blamed continuing risk from sluggish global growth conditions and “financial developments” as the primary factors behind its cautious approach. Yellen pointed out that “concerns about global economic prospects have led to increased financial market volatility and somewhat tighter financial conditions in the United States.”
Though the committee reduced its forecast for economic growth and offered an inflation rate outlook for this year, it highlighted that “economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months.” Improvement in labor market conditions, gradual increase in consumer spending, recovering housing market and sign of stability in financial markets in recent times were cited as the main factors behind the recovering economy. Despite seeing an inflation rate below the 2% target “in the near term,” Yellen said, “The committee continues to feel that we are on a course where the economy is improving and inflation is moving back up.”
Meanwhile, the committee projected the U.S. economy to expand at rates of 2.2% and 2.1% in 2016 and 2017, compared with the earlier forecast of 2.4% and 2.1%, respectively. Though the prediction for this year’s personal consumption expenditures (PCE) – an important indicator of inflation – was reduced from 1.6% to 1.2%, core-PCE was forecast to be at 1.6%, in line with the earlier estimate. Yellen gave the reassurance that “the Committee expects inflation to rise to 2 percent over the next two to three years” as “the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further.”
6 Funds to Gain from Fewer Hikes
Given this low-rate environment and possibility of fewer rate hikes, we highlight six mutual funds from sectors including utility, real estate and gold that are expected to gain from this encouraging backdrop. These funds also carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
These funds have encouraging one-month and year-to-date returns. The minimum initial investment is within $5000. Also, these funds have a low expense ratio and no sales load.
Utility Mutual Funds
Capital intensive sectors such as utility that require a significant volume of debt for organic growth and upgrade of infrastructure are likely to gain from the prevailing low-rate environment.
American Century Utilities Investor (BULIX - Free Report) invests the majority of its assets in equities related to the utility industry. The fund’s portfolio is based on qualitative and quantitative management techniques. In the quantitative process, stocks are ranked on their growth and valuation features.
BULIX currently carries a Zacks Mutual Fund Rank #1. BULIX has one-month and year-to-date returns of 7.4% and 14.7%, respectively. Annual expense ratio of 0.67% is lower than the category average of 1.25%.
Fidelity Telecom and Utilities (FIUIX - Free Report) seeks a high level of total return. The fund focuses on acquiring common stocks of telecom and utility companies and can purchase both foreign and domestic securities. The fund utilizes fundamental analysis on both firm-specific and broader-market and economic factors to select its holdings.
FIUIX currently carries a Zacks Mutual Fund Rank #2. FIUIX has one-month and year-to-date returns of 8.8% and 10.7%, respectively. Annual expense ratio of 0.79% is lower than the category average of 1.25%.
Real Estate Mutual Funds
Real estate is another sector that benefitted significantly from a low-rate environment. This is because the hike in interest rate also increases borrowing rates on mortgages, bank loans, and credit card loans and thus is expected to have a negative impact on demand.
Fidelity Series Real Estate Equity invests the majority of its assets in common stocks of companies associated with the real estate industry across the world. FREDX is expected to provide a higher return than that of the S&P 500 Index.
FREDX currently carries a Zacks Mutual Fund Rank #1. FREDX has one-month and year-to-date returns of 12.3% and 3.6%, respectively. Annual expense ratio of 0.76% is lower than the category average of 1.29%.
T. Rowe Price Real Estate (TRREX - Free Report) seeks long-term growth. TRREX invests a large portion of its assets in the equity securities of real estate companies. TRREX also invests a notable portion in REITs.
TRREX currently carries a Zacks Mutual Fund Rank #1. TRREX has one-month and year-to-date returns of 10.8% and 3.2%, respectively. Annual expense ratio of 0.76% is lower than the category average of 1.29%.
Gold Mutual Funds
Price of gold has a reverse relationship with interest rates. Rising rates mean higher yield on fixed income securities including bonds making them more attractive than gold, which is considered riskier than securities providing fixed income. Thus, higher rates have a negative impact on gold demand. This precious metal touched a six-year low after the Fed opted for a rate hike last December. Subsequently, the no-hike will go in favor of the yellow metal.
Fidelity Select Gold (FSAGX - Free Report) invests heavily in common stocks of companies whose principal operations are related to gold including bullions or coins. A maximum of 25% of FSAGX’s assets are invested in precious metals via a wholly owned subsidiary.
FSAGX currently carries a Zacks Mutual Fund Rank #1. FSAGX has one-month and year-to-date returns of 11.2% and 44.4%, respectively. Annual expense ratio of 0.90% is lower than the category average of 1.44%.
American Century Global Gold Investor (BGEIX - Free Report) invests in securities of global companies whose operations are related to gold or other precious metals. BGEIX invests the lion’s share of its assets in companies involved in processing, mining, fabricating and distributing gold or other precious metals.
BGEIX currently carries a Zacks Mutual Fund Rank #2. BGEIX has one-month and year-to-date returns of 19.4% and 47%, respectively. Annual expense ratio of 0.67% is lower than the category average of 1.44%.
About Zacks Mutual Fund Rank
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