Consumer discretionaries have been having a resilient year. Till the end of November, the Consumer Discretionary Select Sector SPDR (XLY) surged 31.6% year to date. With the unbroken string of interest rate hikes behind us, business has been good.

Consumer spending had risen 0.2% adjusted for inflation month over month in October, down from a solid 0.7% gain in September, weighed down by a sudden spike in inflation fueled by energy prices. This meant that retail sales for the period had gone down 1% per the Census Bureau. Inflation has the biggest and most far-reaching impact on consumer discretionary. When prices of consumer goods are in a state of continuous increase, people rein in spending on non-essential goods.

However, inflation has since gone down, as have energy prices. Since Thanksgiving, holiday sales have picked up tremendously. According to NRF chief economist Jack Kleinhenz, “This year, a whole new set of dynamics is in place. The average household remains on relatively solid financial footing despite pressures from still-high inflation, stringent credit conditions and elevated interest rates. Recent revisions to government data indicate that consumers haven’t drawn down as much of their pandemic savings as believed earlier, and savings are still providing a buffer to support spending. The overall story for this holiday season is that it looks very good.”

Even as excess liquidity has gone down, credit has become more expensive and purchasing power has diminished in these tough times. The National Retail Foundation (“NRF”) expects retail sales for the holiday season to rise between 3% and 4% over 2022. The growth rate is keeping in with the average annual increase of 3.6% from 2010 to 2019, and the projected total sales, which exclude automobile dealers, gasoline stations and restaurants to focus on core retail, would top the $929.5 billion spent by consumers last year.

The fourth quarter is usually a defensive quarter, even for discretionaries, because at this time of the year, people spend anyway. Investor mood is also generally upbeat. In addition, it is widely believed that we have come to the end of the Fed’s rate-hike cycle and may see rate cuts as early as March 2024. This can give consumers even more reason to raise their discretionary purchases during the holiday season. Hence, astute investors should consider mutual funds focused on consumer discretionaries to invest in.

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 such 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. Incidentally, all three belong to Fidelity Investments.

Select Retailing (FSRPX Quick QuoteFSRPX - Free Report) normally invests the majority of its assets in common stocks of companies principally engaged in merchandising finished goods and services primarily to individual consumers. FSRPX uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

As of August 2023, the top three holdings for FSRPX are 25.2% in Amazon, 7.1% in Home Depot and 6.6% in TJX. Boris Shepov has been one of the lead managers for FSRPX since May 2018.

FSRPX’s 3-year and 5-year annualized returns are 3.1% and 9.5%, respectively. Its net expense ratio is 0.72% compared to the category average of 0.79%. FSRPX 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.

Select Consumer Discretionary Portfolio (FSCPX Quick QuoteFSCPX - Free Report) invests the majority of its assets in common stocks of companies principally engaged in the manufacture or distribution of consumer discretionaries. FSCPX uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

As of August 2023, the top three holdings for FSCPX were 24% in Amazon, 14.2% in Tesla and 4.9% in Lowe’s. Jordan Michaels has been one of the lead managers for FSCPX since July 2022.

FSCPX’s 3-year and 5-year annualized returns are 2.7% and 8.1%, respectively. Its net expense ratio is 0.76% compared to the category average of 0.79%. FSCPX has a Zacks Mutual Fund Rank #2.

Select Leisure (FDLSX Quick QuoteFDLSX - Free Report) invests the majority of its assets in common stocks of companies principally engaged in the design, production, or distribution of goods or services in the leisure industries. FDLSX uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

As of August 2023, the top three holdings for FDLSX were 16.7% in McDonald’s, 11.7% in Booking Holdings and 8% in Hilton Worldwide. Kevin Francfort has been one of the lead managers for FDLSX since September 2022.

FDLSX’s 3-year and 5-year annualized returns are 11.9% and 10.9%, respectively. Its net expense ratio is 0.74% compared to the category average of 0.79%. FDLSX has a Zacks Mutual Fund Rank #1.

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