The retail sector is making a steady rebound, with sales increasing for the second consecutive month in May. This comes as inflation has started showing signs of cooling off. Slowing inflation finally led the Fed to keep interest rates unaltered.

This definitely is a positive sign for the retail sector, as lower interest rates will allow consumers to purchase more freely. Given this situation, it would be prudent to invest in retail funds like Fidelity Advisor Consumer Staples Fund Class A (FDAGX Quick QuoteFDAGX - Free Report) , Fidelity Select Retailing Portfolio (FSRPX Quick QuoteFSRPX - Free Report) and Fidelity Select Consumer Staples Portfolio (FDIGX Quick QuoteFDIGX - Free Report) .

Retail Sales Growing

The Commerce Department said that retail sales rose 0.3% in May, following a 0.4% jump in April and surpassing the consensus estimate of a decline of 0.1%. Year over year, retail sales jumped 1.6% in May, indicating that higher demand for consumer goods is driving sales despite still multi-year high inflation.

Excluding sales at gas stations, retail sales rose 0.6%. Online retail sales rose 0.3%. Consumers had cut down on spending over the past years as higher prices have been pinching their pockets. However, demand has been high, and people continued to spend despite the Fed increasing interest rates by 500 basis points over the past year.

May’s retail sales data follows an impressive inflation reading that showed both consumer price and producer price inflation decreasing lately.

The consumer price index (CPI) rose 4% in May, down from April's jump of 4.9%, according to the Bureau of Labor Statistics’ latest report. This was also lower than analysts' projections of 4.1%.

Also, retail inflation in May reached its lowest level since March 2021. This decline can be largely attributed to a sharp reduction in fuel costs. Additionally, grocery prices have also played a role in contributing to the overall decrease in inflation.

The annual increase in food prices fell from its peak of 13.5% to 5.8% in May.

Also, Producer Price Index (PPI) declined more than expected in May. PPI fell 0.3% in May, following a 0.2% increase in April. The PPI has seen a decrease in three out of the past five months, as reported by the Labor Department.

Slowing inflation coupled with the Fed’s decision to halt its interest rate hikes bodes well for the retail sector, as lower borrowing costs will help people spend more. The ideal thing to do in this situation would be to invest in retail sector funds.

3 Best Choices

We have selected three mutual funds with significant exposure to the retail sector. The funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and are poised to gain from the above factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors in identifying potential winners and losers. Unlike most fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also the likely future success of the fund.

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 Advisor Consumer Staples Fund Class A aims for capital growth. FDAGX invests the majority of its assets in securities of companies that manufacture and market consumer staples products. Fidelity Advisor Consumer Staples Fund Class A primarily invests in common stocks of companies.

Fidelity Advisor Consumer Staples Fund Class A has a history of positive total returns for more than 10 years. Specifically, FDAGX has returned nearly 10.8% and 9.5% over the past three and five-year periods, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FDAGX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, which is below the category average of 0.76%.

Fidelity Select Retailing Portfolio fund aims for capital appreciation. FSRPX invests a large portion of its assets in the common stock of companies engaged in merchandising finished goods and services, primarily to individual consumers.

Fidelity Select Retailing Portfolio has a history of positive total returns for more than 10 years. Specifically, FSRPX has returned nearly 6.1% and nearly 8.6% over the past three and five-year periods, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSRPX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.72%, which is below the category average of 0.79%.

Fidelity Select Consumer Staples Portfolio fund aims at capital appreciation. FDIGX invests its assets in the common stock of companies engaged in the manufacture, sale, or distribution of consumer staples.

Fidelity Select Consumer Staples Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FDIGX has returned nearly 11.1% and nearly 9.9% over the past three and five-year periods, respectively.

FDIGX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, which is below the category average of 0.79%. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

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