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3 Financial Mutual Funds to Buy in View of Imminent Rate Cuts
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Fed Chair Jerome Powell has continued suggesting for a while that he is fairly certain of cuts to the benchmark interest rate this year, but the Fed would embark on that journey only after reviewing further data. However, comments made by various Fed officials suggest, and it is now amply evident, that inflation is at the mark that the Fed wants it to be. That also indicates that we are going to witness the much-awaited rate cuts in September itself. In fact, it is the extent of the rate cut that is currently being debated.
Both consumer and producer-side inflation are in line with expectations, making investors’ mood upbeat. Per CME’s FedWatch tool, there is a 63% likelihood that the Fed would announce a 50-basis point cut from its meeting.
This, however, only addresses the problem of immediate relief needed by consumers. In reality, if rates fall by 50 basis points and are held at a target rate of 475-500, it is still pretty high. When interest rates are high, banks and other financial institutions generally see higher profitability due to increased lending rates. The gap between such lending rates is considered a long-term asset for banks. Also, short-term liabilities such as deposits increase and boost net interest margins.
Stocks of banks, insurance companies and other financial institutions go up with continuous interest rate hikes. This is because financial services companies can earn more on the money they have and on the credit they issue to their customers. As a result, the S&P 500 Financials Select Sector SPDR (XLF) has soared 21.5% year to date.
For these reasons, financial mutual funds might provide much-required stability in a high-rate environment market. 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 financial 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 as well as carry a low expense ratio.
T. Rowe Price Financial Services (PRISX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stocks issued by companies engaged in providing financial services to consumers and industry. PRISX advisors aim to invest in high quality companies with good appreciation prospects.
Matt J. Snowling has been the lead manager of PRISX since June 2021, and 80.2% of the fund is invested in the financial sector. Three top holdings for PRISX are 4.3% in Wells Fargo, 4.2% in Citigroup and 3.9% in Visa.
PRISX’s 3-year and 5-year annualized returns are 9% and 14.7%, respectively. Its net expense ratio is 0.83%. PRISX 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.
Fidelity Select Consumer Discretionary Portfolio (FSCPX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in securities of companies principally engaged in the manufacture and distribution of consumer discretionary products and services. FSCPX advisors employ fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions to select investments.
Jordan Michaels has been the lead manager of FSCPX since July 2022, and 97.1% of the fund is invested in the financial sector. Three top holdings of FSCPX are 11.1% in Marsh & McLennan, 10.7% in Chubb and 9% in Arthur J. Gallagher.
FSCPX’s 3-year and 5-year annualized returns are 17.8% and 16.6%, respectively. Its net expense ratio is 0.79%. FSCPX has a Zacks Mutual Fund Rank #1.
Fidelity Select Financials Portfolio (FIDSX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stocks issued by companies providing financial services to consumers and industry. FIDSX offers dividends and capital gains twice a year, in September and December.
Matt Reed has been the lead manager of FIDSX since May 2019, and 79.9% of the fund is invested in the financial sector. The three top holdings of FIDSX are Mastercard (9.2%), Wells Fargo (7.4%) and Bank of America (6%).
FIDSX’s 3-year and 5-year annualized returns are 9% and 14.4%, respectively. Its net expense ratio is 0.76%. FIDSX has a Zacks Mutual Fund Rank #1.
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3 Financial Mutual Funds to Buy in View of Imminent Rate Cuts
Fed Chair Jerome Powell has continued suggesting for a while that he is fairly certain of cuts to the benchmark interest rate this year, but the Fed would embark on that journey only after reviewing further data. However, comments made by various Fed officials suggest, and it is now amply evident, that inflation is at the mark that the Fed wants it to be. That also indicates that we are going to witness the much-awaited rate cuts in September itself. In fact, it is the extent of the rate cut that is currently being debated.
Both consumer and producer-side inflation are in line with expectations, making investors’ mood upbeat. Per CME’s FedWatch tool, there is a 63% likelihood that the Fed would announce a 50-basis point cut from its meeting.
This, however, only addresses the problem of immediate relief needed by consumers. In reality, if rates fall by 50 basis points and are held at a target rate of 475-500, it is still pretty high. When interest rates are high, banks and other financial institutions generally see higher profitability due to increased lending rates. The gap between such lending rates is considered a long-term asset for banks. Also, short-term liabilities such as deposits increase and boost net interest margins.
Stocks of banks, insurance companies and other financial institutions go up with continuous interest rate hikes. This is because financial services companies can earn more on the money they have and on the credit they issue to their customers. As a result, the S&P 500 Financials Select Sector SPDR (XLF) has soared 21.5% year to date.
For these reasons, financial mutual funds might provide much-required stability in a high-rate environment market. 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 financial 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 as well as carry a low expense ratio.
T. Rowe Price Financial Services (PRISX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stocks issued by companies engaged in providing financial services to consumers and industry. PRISX advisors aim to invest in high quality companies with good appreciation prospects.
Matt J. Snowling has been the lead manager of PRISX since June 2021, and 80.2% of the fund is invested in the financial sector. Three top holdings for PRISX are 4.3% in Wells Fargo, 4.2% in Citigroup and 3.9% in Visa.
PRISX’s 3-year and 5-year annualized returns are 9% and 14.7%, respectively. Its net expense ratio is 0.83%. PRISX 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.
Fidelity Select Consumer Discretionary Portfolio (FSCPX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in securities of companies principally engaged in the manufacture and distribution of consumer discretionary products and services. FSCPX advisors employ fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions to select investments.
Jordan Michaels has been the lead manager of FSCPX since July 2022, and 97.1% of the fund is invested in the financial sector. Three top holdings of FSCPX are 11.1% in Marsh & McLennan, 10.7% in Chubb and 9% in Arthur J. Gallagher.
FSCPX’s 3-year and 5-year annualized returns are 17.8% and 16.6%, respectively. Its net expense ratio is 0.79%. FSCPX has a Zacks Mutual Fund Rank #1.
Fidelity Select Financials Portfolio (FIDSX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stocks issued by companies providing financial services to consumers and industry. FIDSX offers dividends and capital gains twice a year, in September and December.
Matt Reed has been the lead manager of FIDSX since May 2019, and 79.9% of the fund is invested in the financial sector. The three top holdings of FIDSX are Mastercard (9.2%), Wells Fargo (7.4%) and Bank of America (6%).
FIDSX’s 3-year and 5-year annualized returns are 9% and 14.4%, respectively. Its net expense ratio is 0.76%. FIDSX has a Zacks Mutual Fund Rank #1.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>