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Mutual Fund Commentary

Retail sales registered a stable increase last month, posting its best two-month rise since early 2014. Increase in job creation, lower unemployment rate and steady inflation had a positive impact on consumer spending. Rising consumer spending boosted retail sales and is expected to continue to benefit retailers this holiday season. 

Auto parts dealers registered strong sales growth. Strong gains in gas stations also boosted overall retail sales. Grocers, home-improvement stores and online store sales too moved north. Given this healthy pattern of consumer spending, it will be wise to invest in funds linked to the retail industry.

Consumer Spending Rise in October

The Commerce Department said on Tuesday that U.S. retail sales moved north in October. Sales at retail stores and restaurants rose 0.8% in October after increasing 1% in September, reporting its best two-month increase since March–April 2014. Out of the 13 major categories, 11 registered improvement in sales for the second consecutive month.

Car sales rose 1.1% to 96,815 in October, reaching its best settlement in 11 months. Sales at food and beverage stores increased 0.9%. Car sales at a seasonally adjusted annualized rate (“SAAR”) increased to 17.9 million units in October from 17.7 million units in September, the highest SAAR since November 2015.

Moreover, sales at gas stations advanced 2.2% due to high fuel prices. Rising gasoline prices will help to boost the domestic economy. American households also shopped more online, which eventually boosted retail sales. Online shopping went up 1.5%, witnessing the highest increase in five months.

Further, the so-called core retail sales figure that excludes automobiles, gasoline, building materials and food services increased 0.8% in October following a rise of 0.7% in September.

Upbeat Labor Market

The U.S. economy also added 161,000 jobs in October, while the unemployment rate fell to 4.9% from 5%, reflecting tighter labor market conditions. The jobless rate remained near an eight-year low. Healthcare companies, professional and business services, and financial firms led the way in job creation.

Hiring improved considerably in the prior two months, indicating that the economy has plenty of room to run. Improvement in employment opportunities will lead to an uptick in spending levels. Thanks to Thanksgiving, Black Friday and Cyber Monday lined up this month consumers are expected to stretch their wallet a little further.

3 Retail Fund Picks

Along with strong retail sales numbers in the last two months, companies related to the retail sector are continued to gain even further this month. This is borne out by the fact that the SPDR S&P Retail ETF (XRT) gained 13.9% in the last six months, turning out to be one of the best performing sectors among the key S&P 500 sectors. Additionally, mutual funds related to the broader consumer defensive sector registered strong returns. According to Morningstar, the consumer defensive mutual fund posted year-to-date and 1-year returns of 2.1% and 5.6%, respectively.

Against this encouraging backdrop, we have selected three retail mutual funds that boast a Zacks Mutual Zacks Rank #2 (Buy). Moreover, these funds have impressive 3-year and 5-year annualized 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 Retailing Portfolio (FSRPX - Free Report) seeks capital appreciation. FSRPX invests a large portion of its assets in securities of companies engaged in merchandising finished goods and services primarily to individual consumers. FSRPX comes under the category of consumer cyclical funds. As of the last filing, Amazon.com Inc, Home Depot Inc and TJX Companies Inc were the top holdings for this fund.

FSRPX’s 3-year and 5-year annualized returns are 11.4% and 18.4%, respectively. Annual expense ratio of 0.80% is lower than the category average of 1.28%. FSRPX has a Zacks Mutual Fund Rank #2.

Fidelity Select Leisure Portfolio (FDLSX - Free Report) invests the majority of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure industries. FDLSX comes under the category of consumer cyclical funds. As of the last filing, Starbuck’s Corp, Mcdonald’s Corp and Yum Brands Inc were the top holdings for FDLSX.

This fund’s 3-year and 5-year annualized returns are 6.6% and 13.7%, respectively. Annual expense ratio of 0.78% is lower than the category average of 1.28%. FDLSX has a Zacks Mutual Fund Rank #2.

Putnam Global Consumer A (PGCOX - Free Report) seeks growth of capital. This fund invests a major portion of its assets in securities of companies in the consumer discretionary products and services industries. PGCOX is a non-diversified fund. PGCOX comes under the category of consumer defensive funds. As of the last filing, Amazon.com Inc, Charter Communications Inc and Anheuser-Busch InBev SA/NV were the top holdings for PGCOX.

PGCOX’s 3-year and 5-year annualized returns are 4.2% and 12.1%, respectively. Annual expense ratio of 1.28% is lower than the category average of 1.38%. This fund has a Zacks Mutual Fund Rank #2.

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