The Fed’s decision to hold interest rates firm came as a breather for investors. Although the central bank hinted at a rate hike by the end of this year, continued issues cropping up at Deutsche Bank might come in the way of a liftoff.
Given the hike or no hike conundrum, investing in safe-haven sectors like utilities, real estate and gold might turn out to be sensible. Companies from these sectors require a continuous inflow of funds and are generally debt-dependent in nature. Low interest rates are good for such companies as it decreases their cost of capital and will eventually boost their profitability.
A Quick Glance at FOMC Policy Statement
After the end of its two-day policy meeting last week, the Fed kept its key interest rates unchanged. In its policy statements, the FOMC said that the argument in favor of a rate hike “has strengthened.” However, the central bank preferred to wait for “further evidence of continued progress” before raising rates.
A liftoff is unlikely before the FOMC’s policy meeting in December. Also, Fed Chairwoman Janet Yellen indicated that the majority of the policymakers are rooting for a December rate increase.
Deutsche Bank Woes
While markets were digesting chances of an imminent hike, a new development raised eyebrows. Germany’s Deutsche Bank AG’s (DB - Analyst Report) shares are down more than 55% year to date following news that the leading bank is facing a $14 billion fine from the U.S. Justice Department. The bank needs to settle civil claims related to the sale of structured mortgage bonds during the 2008–2009 financial crisis. Moreover, Chancellor Angela Merkel said that she wouldn’t offer state aid to the giant lender.
The recent problems in Germany’s biggest bank continued to weigh on Treasury yields and are expected to negatively impact the Fed’s plans to hike rates in December.
Focus on These Three Sectors
With interest rates remaining at a low range of 0.25–0.5%, the borrowing cost will remain low. As companies from utilities sector require continuous inflow of funds, they are expected to perform well in a low rate environment. A decrease in operational costs will invariably improve the profit structure of these companies.
Moreover, the Utilities Select Sector SPDR ETF (XLU) gained 14% year-to-date. Additionally, mutual funds related to this sector also registered strong returns. According to Morningstar, the utilities mutual fund posted year-to-date returns of 15.1%.
The real estate sector includes residential, commercial and industrial real estate. Like utilities, this sector also requires huge amount of debt capital. So, low interest rates will not only boost capital gains in the real estate sector but will also improve dividend income.
Further, the Real Estate Select Sector SPDR (XLRE) gained 5.6% year-to-date. Additionally, mutual funds related to this sector also registered strong returns. According to Morningstar, the real estate mutual fund posted year-to-date returns of 10.1%.
Federal Reserve’s move to keep interest rates steady in its last week’s meeting helped the yellow metal eke out gains. The low-rate environment is speculated to boost the demand for gold as yield hungry investors give precedence to this safe-haven asset over other securities.
Additionally, the SPDR Gold Shares (GLD) gained 24.3% year-to-date. Additionally, mutual funds related to this sector also registered strong returns. According to Morningstar, the equity precious metals mutual fund posted year-to-date returns of 94.8%.
Buy 6 Mutual Funds as Rates Remain Unchanged
Here we have selected two mutual funds from each of the three sectors – utilities, real estate and precious metals –that have a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have impressive year-to-date (YTD) returns. They also have minimum initial investment within $5000 and possess 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.
American Century Utilities Investor (BULIX - MF report) invests more than 80% of its assets in common stocks of companies engaged in utilities sector. BULIX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.68%, lower than the category average of 1.33%. The fund has YTD returns of 20.4%.
Fidelity Advisor Utilities A (FUGAX - MF report) invests the lion’s share of its assets in securities of utilities companies. FUGAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.12%, lower than the category average of 1.33%. The fund has YTD returns of 16.6%.
Real Estate Funds
Fidelity Real Estate Investment Portfolio (FRESX - MF report) invests majority of its assets in securities of companies involved in real estate industry. FRESX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.78%, lower than the category average of 1.30%. The fund has YTD returns of 13.1%.
Goldman Sachs Real Estate Securities A (GREAX - MF report) seeks growth of capital for the long run by investing heavily in real estate companies. GREAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.26%, lower than the category average of 1.30%. The fund has YTD returns of 10.4%.
Precious Metals Fund
Fidelity Select Gold (FSAGX - MF report) invests bulk of its assets in securities of companies engaged in gold-based activities. FSAGX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.93%, lower than the category average of 1.33%. The fund has YTD returns of 86.9%.
Wells Fargo Precious Metals A (EKWAX - MF report) seeks capital growth by investing bulk of its assets in stocks of companies involved in precious metals business. EKWAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.10%, lower than the category average of 1.33%. The fund has YTD returns of 89.4%.
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