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4 Telecom Mutual Funds to Buy on Slim Chances of Rate Hike

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Recently, August jobs data came in weak and manufacturing and service-sector activity was reported to have lost steam. Following these developments, yield-bearing assets lost their appeal. Income-seeking investors are now hoping that following a slew of disappointing economic data, the Fed will refrain from hiking rates in September.

With this, debt-dependent sectors emerged as strong bets. One such sector is telecom, which mainly constitutes of companies that provide television, telephone, computer networks and wireless services. So, the addition of mutual funds that have significant exposure to the telecom sector could be prudent investment options. But first, let’s look at some of the recent economic data which gave the telecom sector a boost.

Manufacturing Weakens Since February

According to the Institute for Supply Management (ISM), its manufacturing index dropped to 49.4 in August from 52.6 last month. Any reading below 50 indicates contraction in manufacturing activity. In fact, the index fell below this level for the first time since February.

After five straight months of gains, manufacturing activity contracted in August. Adding to economic woes, the August job data turned up weak, leading to speculation over a change in the Fed’s immediate rate hike plans.

Jobs Report Upsets

After strong gains in July, the pace of hiring slowed down in August. The non-farm payroll reading of 151,000 last month was well below the estimated 180,000 and the upwardly revised July reading of 275,000. The unemployment rate was unchanged from the prior month at 4.9%, whereas analysts had expected the rate to fall to 4.8%.

Average hourly earnings gained 0.1% or only 3 cents in August from July to be $25.73 per hour, and rose 2.4% from a year earlier to $25.73 in August. However, this was less than July’s annual gain of 2.7%, which was the best in seven years.

Last month’s wage gains were not at all satisfactory and are expected to hinder the Fed’s 2% target for a considerable period of time. Following this, a September rate hike seems most unlikely.

Service Sector Data Disheartens

Per the ISM, its non-manufacturing or service index fell from 55.5% in July to 51.4% in August. Although service activity registered growth last month, the pace was comparatively slow. Non-manufacturing activity posted its slowest growth since early 2010.

The Non-Manufacturing Business Activity Index, Employment Index, New Orders Index and Employment Index decreased in August from July. With this, growth in the service sector was disappointing.

Why Invest In Telecom Mutual Funds?

Companies in this sector have the ability to generate stable returns for investors. Also, it is speculated that the U.S. telecommunications industry will witness reasonable growth throughout this year.

Moreover, with chances of a rate hike disappearing, yield-bearing investments like bonds and other fixed income instruments look less attractive, while telecom funds with favorable yield become appealing.

Also, the telecom services sector within the S&P 500 gained 3.6% in last three months. Additionally, mutual funds related to this sector also registered strong returns. According to Morningstar, the broader communication mutual fund posted 3-month, year-to-date (YTD) and 1-year returns of 4.1%, 11.5% and 14.5%, respectively.

Buy These 4 Telecom Mutual Funds

This encouraging backdrop calls for investors’ attention to four telecom mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and have encouraging yields. Moreover, these funds have impressive YTD returns. They also have minimum initial investment within $5000 and low expense ratios.

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.

Fidelity Select Telecommunications Portfolio FSTCX seeks growth of capital. FSTCX invests more than 80% of its assets in securities of both domestic and foreign companies providing communication services. The fund has YTD returns of 17.9%, and an expense ratio of 0.81% as compared to the category average of 1.43%. FSTCX has a Zacks Mutual Fund Rank #1. Its annual dividend yield is 1.1%.

Fidelity Advisor Telecommunications A FTUAX invests a bulk of its assets in securities of companies engaged in the manufacturing and development of communication equipment. FTUAX seeks capital growth. The fund has YTD returns of 17.2%, and an expense ratio of 1.15% as compared to the category average of 1.43%. FTUAX carries a Zacks Mutual Fund Rank #1 and has an annual dividend yield of 0.8%.

Fidelity Select Communications Equipment Portfolio (FSDCX - Free Report) seeks appreciation of capital. FSDCX invests the majority of its assets in securities of companies involved in the manufacture and sale of communication equipment. The fund has YTD returns of 13.6%, and an expense ratio of 0.89% as compared to the category average of 1.48%. FSDCX has a Zacks Mutual Fund Rank #2. The annual dividend yield of the fund is 1.1%.

T. Rowe Price Media & Telecommunications PRMTX invests the lion’s share of its assets in securities of technology, media and telecommunications companies. PRMTX seeks capital appreciation over the long run. The fund has YTD returns of 11%, and an expense ratio of 0.79% as compared to the category average of 1.43%. PRMTX sports a Zacks Mutual Fund Rank #1.Its annual dividend yield is 0.2%.

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