In recent weeks, trade has been taking comfort from the fact that a gradually slowing down inflation and economic data showing sectoral stagnation would deter the Federal Reserve from raising interest rates going forward. Focus sectors like manufacturing and the labor market have shown clear signs that the Fed’s restrictive monetary policy measures are taking effect, and further tightening of policy might push the economy into a recession, which the central bank would almost certainly like to avoid.
Treasury yields have remained high, although they are down from the 16-year highs seen in late October. Consumers have shown the inclination to go on a holiday buying spree, with the Black Friday-Cyber Monday weekend showing a significant rise in e-commerce sales over 2022. Currently, there is a consensus that rates would not go up in the near term. In fact, market participants are not ruling out the first rate cut by as early as April 2024.
Markets, however, are likely to remain volatile for a while. The Fed has been sending mixed signals about raising rates, not ruling it out. The upbeat mood seen among investors over the last two months has been present, ignoring these signals and not because of it. With the holiday season likely to improve this optimism, 2023 should end on a high note. However, with the central bank not ready to announce an end to its rate-hike cycle, investors are also likely to diversify and hedge risk in defensive sectors.
Defensive stocks remain in demand when markets are volatile because of their intrinsic nature. Even during the 2008 financial crisis, they had held the fort. Utility mutual funds are examples of such defensive instruments that protect investments when the goings are not good. The steady nature of the sector is ensured by the fact that demand for essential services is relatively unaffected by market volatility because of their non-discretionary nature. Whatever the state of the economy, a household or a business needs electricity, water, or gas, even if prices go up.
In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are usually higher than those paid by other equities.
In this environment, utility mutual funds provide much-required stability and growth potential. 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 utility 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, and carry a low expense ratio. We have also made sure that at least 70% of the fund is invested in the utility sector.
Fidelity Telecom and Utilities ( FIUIX Quick Quote FIUIX - Free Report) seeks high total return through current income generation and capital appreciation. FIUIX primarily invests in common stocks, with at least 80% of assets in securities of telecommunications and utility companies. The fund invests in domestic and foreign issuers. The fund factors in the fundamental analysis of each issuer's financial condition and industry position, as well as market and economic conditions.
Douglas Simmons has been the lead manager of FIUIX since Sep 29, 2005, and 73.8% of the fund is currently invested in the utility sector. Three top holdings for FIUIX are 9.5% in The Southern Company, 7.1% in PG&E and 6.4% in Constellation Energy.
FIUIX’s 3-year and 5-year annualized returns are 4.9% and 5%, respectively. The fund has a dividend yield of 1.9%, and its net expense ratio is 0.77% compared to the category average of 0.94%. FIUIX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds,
please click here. Franklin Utilities Advisor ( FRUAX Quick Quote FRUAX - Free Report) seeks capital appreciation and current income by investing the majority of its net assets in the public utility sectors like natural gas, water and communications services. FRUAX invests mostly in equity securities but may invest a small portion of its assets in debt securities.
John Kohli has been the lead manager of FRUAX since Dec 30, 1998, and 94.1% of the fund is currently invested in the utility sector. Three top holdings for FRUAX are 11.7% in NextEra Energy, 5% in The Southern Company and 4.8% in Edison International.
FRUAX’s 3-year and 5-year annualized returns are 3% and 5.9%, respectively. The fund has a dividend yield of 2.6%, and its net expense ratio is 0.55% compared to the category average of 0.94%. FRUAX has a Zacks Mutual Fund Rank #1.
PGIM Jennison Utility Fund ( PRUAX Quick Quote PRUAX - Free Report) invests the majority of its net assets in equity and equity-related and investment-grade debt securities of utility companies. The fund is non-diversified.
Bobby Edemeka has been the lead manager of PRUAX since Mar 30, 2005, and 84.5% of the fund is currently invested in the utility sector. Three top holdings for PRUAX are 10.7% in NextEra Energy, 6.3% in PG&E and 5.3% in Constellation Energy.
PRUAX’s 3-year and 5-year annualized returns are 2.4% and 6.6%, respectively. The fund has a dividend yield of 1.6%, and its net expense ratio is 0.83% compared to the category average of 0.94%. PRUAX has a Zacks Mutual Fund Rank #2.
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