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3 Utility Mutual Funds to Buy on the Fed Lowering Interest Rates
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Because of its defensive character, the utilities sector usually serves as a fallback option for investors during economic downturns. However, it falls out of favor when economic growth occurs, with mega-cap stocks such as tech driving the markets.
This defensive nature of the utility sector makes it resilient against volatility. Even during the 2008 global economic crisis, it held the fort. After the subprime crisis, the Fed cut interest rates to stimulate the economy and investors flocked to utilities. Utility stocks are examples of such defensive instruments that protect investments when the goings are not good. Whatever the state of the economy, a household or a business needs its electricity, water, or gas supplies.
The market has already witnessed the first string of interest rate cuts by the Fed, starting September, to mark the first loosening of grip on monetary policy since tightening started in early 2022. While the central bank insists that investors must not expect rapid rate cuts in 2025, at least another two instances of rate reductions are currently anticipated.
The sector has been doing very well over the past year, with the S&P 500 Select Sector SPDR (XLU) advancing 23.3% year to date as of Dec. 31, 2024. The sector reached peak growth around Fall. Growth has been driven primarily by the optimism around artificial intelligence (AI) and the energy needed to power it. While nuclear energy and other alternate forms of energy have investors’ attention, a keydriver of the sector has also been the upward momentum in electric demand in the United States.
In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are generally higher than those paid by other equities. In this environment, utility stocks provide much-required stability and growth potential. Hence, astute investors should consider such stocks at present.
In this environment, utility mutual funds provide much-required stability and growth potential. 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 utility 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.
American Century Utilities Investor Shares (BULIX - Free Report) primarily invests in equity securities of utility companies. BULIX advisors use quantitative and qualitative management techniques, as well as risk controls, to arrive at their investment decisions. This involves ranking stocks based on their growth and valuation characteristics.
Stephen Quance has been the lead manager of BULIX since August 2023. Three top holdings for BULIX are 10.6% in NextEra Energy, 7% in The Southern Company and 6.1% in Constellation Energy
BULIX’s 3-year and 5-year annualized returns are 8.8% and 6.6%, respectively. Its net expense ratio is 0.66% compared to the category average of 0.95%. BULIX 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 Utilities (FSUTX - Free Report) seeks capital appreciation and current income by investing the majority of its net assets in utilities and companies earning revenues from utility operations. FSUTX advisors use fundamental analysis of each issuer's financial condition and industry position, as well as market and economic conditions, to arrive at their investment decisions.
Pranay Kirpalani has been the lead manager of FSUTX since December 2024. Three top holdings for FSUTX are 13% in NextEra Energy, 7.1% in Sempra and 6.2% in PG&E.
FSUTX’s 3-year and 5-year annualized returns are 16.2% and 12%, respectively. Its net expense ratio is 0.67%, compared to the category average of 0.95%. FSUTX has a Zacks Mutual Fund Rank #1.
Franklin Utilities A1 (FKUTX - Free Report) invests the majority of its net assets in securities of public utilities companies, which provide electricity, natural gas, water and communications services.
John Kohli has been the lead manager of FKUTX since December 1998. Three top holdings for FKUTX are 10.8% in NextEra, 5.5% in The Southern Company and 5.1% in Edison International.
FKUTX’s 3-year and 5-year annualized returns are 13.1% and 9.8%, respectively. Its net expense ratio is 0.72% compared to the category average of 0.95%. FKUTX has a Zacks Mutual Fund Rank #2.
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3 Utility Mutual Funds to Buy on the Fed Lowering Interest Rates
Because of its defensive character, the utilities sector usually serves as a fallback option for investors during economic downturns. However, it falls out of favor when economic growth occurs, with mega-cap stocks such as tech driving the markets.
This defensive nature of the utility sector makes it resilient against volatility. Even during the 2008 global economic crisis, it held the fort. After the subprime crisis, the Fed cut interest rates to stimulate the economy and investors flocked to utilities. Utility stocks are examples of such defensive instruments that protect investments when the goings are not good. Whatever the state of the economy, a household or a business needs its electricity, water, or gas supplies.
The market has already witnessed the first string of interest rate cuts by the Fed, starting September, to mark the first loosening of grip on monetary policy since tightening started in early 2022. While the central bank insists that investors must not expect rapid rate cuts in 2025, at least another two instances of rate reductions are currently anticipated.
The sector has been doing very well over the past year, with the S&P 500 Select Sector SPDR (XLU) advancing 23.3% year to date as of Dec. 31, 2024. The sector reached peak growth around Fall. Growth has been driven primarily by the optimism around artificial intelligence (AI) and the energy needed to power it. While nuclear energy and other alternate forms of energy have investors’ attention, a keydriver of the sector has also been the upward momentum in electric demand in the United States.
In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are generally higher than those paid by other equities. In this environment, utility stocks provide much-required stability and growth potential. Hence, astute investors should consider such stocks at present.
In this environment, utility mutual funds provide much-required stability and growth potential. 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 utility 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.
American Century Utilities Investor Shares (BULIX - Free Report) primarily invests in equity securities of utility companies. BULIX advisors use quantitative and qualitative management techniques, as well as risk controls, to arrive at their investment decisions. This involves ranking stocks based on their growth and valuation characteristics.
Stephen Quance has been the lead manager of BULIX since August 2023. Three top holdings for BULIX are 10.6% in NextEra Energy, 7% in The Southern Company and 6.1% in Constellation Energy
BULIX’s 3-year and 5-year annualized returns are 8.8% and 6.6%, respectively. Its net expense ratio is 0.66% compared to the category average of 0.95%. BULIX 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 Utilities (FSUTX - Free Report) seeks capital appreciation and current income by investing the majority of its net assets in utilities and companies earning revenues from utility operations. FSUTX advisors use fundamental analysis of each issuer's financial condition and industry position, as well as market and economic conditions, to arrive at their investment decisions.
Pranay Kirpalani has been the lead manager of FSUTX since December 2024. Three top holdings for FSUTX are 13% in NextEra Energy, 7.1% in Sempra and 6.2% in PG&E.
FSUTX’s 3-year and 5-year annualized returns are 16.2% and 12%, respectively. Its net expense ratio is 0.67%, compared to the category average of 0.95%. FSUTX has a Zacks Mutual Fund Rank #1.
Franklin Utilities A1 (FKUTX - Free Report) invests the majority of its net assets in securities of public utilities companies, which provide electricity, natural gas, water and communications services.
John Kohli has been the lead manager of FKUTX since December 1998. Three top holdings for FKUTX are 10.8% in NextEra, 5.5% in The Southern Company and 5.1% in Edison International.
FKUTX’s 3-year and 5-year annualized returns are 13.1% and 9.8%, respectively. Its net expense ratio is 0.72% compared to the category average of 0.95%. FKUTX has a Zacks Mutual Fund Rank #2.
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 >>