The retail sector has faced several challenges over the past year but is on track to make a solid recovery as inflation and price pressures begin to subside. Sales have been increasing in recent months, and the sector is poised to get a further boost from the Federal Reserve's recently announced rate cut and the upcoming holiday season.

Investing in retail and discretionary funds will thus be a prudent choice to earn profits in the near term. Three such funds are Fidelity Select Consumer Staples Portfolio (FDFAX Quick QuoteFDFAX - Free Report) , Fidelity Select Retailing Portfolio (FSRPX Quick QuoteFSRPX - Free Report) and Fidelity Select Leisure Portfolio (FDLSX Quick QuoteFDLSX - Free Report) .

September Retail Sales Jump

The Commerce Department said on Thursday that retail sales rose 0.4% in September, following a 0.1% rise in the previous month and above the consensus estimate of an increase of 0.3%. When excluding auto sales, retail sales increased 0.5%, easily surpassing economists’ expectations of a 0.1% increase.

The retail sector struggled in 2023 as high interest rates led consumers to reduce their spending. However, last month, the Federal Reserve started its easing cycle, implementing a 50-basis point rate cut — the first since March 2020.

Lower interest rates are expected to reduce price pressures, allowing consumers to spend more freely.

Holiday Season to Help the Retail Sector

The U.S. holiday season kicks off next month, which is expected to further benefit the retail sector. Retailers anticipate a busy shopping period as millions of Americans take to the stores over the next two months.

E-commerce has significantly contributed to holiday retail sales in recent years, and this year is expected to be no exception. A new forecast from Adobe Analytics predicts that online sales will grow 8.4% from last year, reaching $240.8 billion during the holiday season, which typically spans from November 1 to December 31.

Last year, online holiday sales totaled $221.8 billion, increasing 4.9% year over year. Additionally, shopping via mobile devices is anticipated to set a new record of $128.1 billion, reflecting 12.8% year-over-year growth.

Online sales during Cyber Week, which includes the five-day shopping period from Thanksgiving to Cyber Monday, are projected to reach $40.6 billion. This marks a 7% increase from last year and represents 16.9% of total holiday season sales.

3 Best Choices

We have selected three mutual funds with significant exposure to the retail and discretionary sectors. The funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and are poised to gain from the above factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors in identifying potential winners and losers. Unlike most fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Select Consumer Staples Portfolio fund aims for capital growth. FDFAX invests the majority of its assets in securities of companies primarily engaged in manufacturing, marketing, or distribution of consumer staples products. Fidelity Select Consumer Staples Portfolio fund invests in both U.S. and non-U.S. issuers.

Fidelity Select Consumer Staples Portfolio has a history of positive total returns for more than 10 years. Specifically, FDFAX has returned 8.3% and 9.2% over the past three and five-year periods, respectively. FDFAX has a Zacks Mutual Fund Rank #2, and its annual expense ratio is 0.72%, which is lower than the category average of 0.94%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Fidelity Select Retailing Portfolio fund aims for capital appreciation. FSRPX invests a large portion of its assets in the common stock of companies engaged in merchandising finished goods and services, primarily to individual consumers.

Fidelity Select Retailing Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSRPX has returned nearly 3.9% and 13.2% over the past three and five-year periods, respectively. Fidelity Select Retailing Portfolio fund has a Zacks Mutual Fund Rank #1 and its annual expense ratio is 0.71%, which is lower than the category average of 0.99%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Fidelity Select Leisure Portfolio fund 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.

Fidelity Select Leisure & Entertainment fund has a history of positive total returns for more than 10 years. Specifically, FDLSX has returned nearly 10% and 13.6% over the past three and five-year periods, respectively. FDLSX has a Zacks Mutual Fund Rank #2 and its annual expense ratio is 0.73%, which is lower than the category average of 0.99%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

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