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The U.S. service sector activity staged a rebound in August and reached the highest level in the last two months on the back of a strong upside in business activity, new orders, employment and prices paid. Out of the 17 key non-manufacturing industries, steady growth in 15 industries boosted service sector activity in August. Following this development, the service sector looks quite attractive and is expected to expand further.

Strong growth in service activity came as a breather for the domestic economy after investors digested a slower pace of job additions. Investing in mutual funds having significant exposure to services-related companies may prove prudent at this point.

ISM Services Scales New High

The Institute of Supply Management (ISM) reported that its ISM Services Index increased 1.4% from July to 55.3% last month. To date, the U.S. services index has posted expansion for 92 straight months. Beside the ISM report, IHS Markit Economics’ U.S. services PMI advanced from 54.7% in July to 56% in August, registering its best pace of expansion since July 2015.

After a poor July performance, business activity, new orders, prices and employment registered growth at a faster pace in August. Also, most of the industries offered a positive outlook about the present business conditions and the economy in general. 

Business Activity & New Orders Expand

The business activity index rose from 55.9% in July to 57.5% in August, registering its 97th consecutive month of growth. While 12 industries reported growth, only three experienced a decline in business activity. August not only experienced growth in business activity but also in new orders for the 97th successive month. New order count rose from 55.1% in July to 57.1% in August. Also, 14 industries experienced expansion whereas only two witnessed contraction in new orders.

The prices index rose last month for the third straight time. ISM’s Non-Manufacturing Prices index progressed from 55.7% in July to 57.9% in August. Meanwhile, 12 industries reported expansion in prices paid and three witnessed a fall. Additionally, employment activity advanced to 57.9% in August from 55.7% in the prior month. Here, 11 industries reported an increase in employment, while three witnessed a slump in the same.

Buy These 5 Mutual Funds

Following these developments in the economy, investors may consider service sector-related mutual funds. We have selected five mutual funds that flaunt a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging year-to-date, one-year and three-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 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. The fund seeks growth of capital. This non-diversified fund invests both in U.S. and non-U.S. companies.

FDLSX has an annual expense ratio of 0.79%, lower than the category average of 1.39%. The fund has year-to-date, one-year and three-year annualized returns of 17.3%, 20.6% and 11.2%, respectively. FDLSX has a Zacks Mutual Fund Rank #1.

Wells Fargo Utility and Telecommunications A (EVUAX - Free Report) invests heavily in common and preferred stocks and investment-grade debt securities of utilities and telecom companies. EVUAX also invests around 35% of its assets in convertible debentures of utilities and telecom companies. This non-diversified fund seeks returns through growth of income and capital.

EVUAX has an annual expense ratio of 1.14%, lower than the category average of 1.25%. The fund has year-to-date, one-year and three-year annualized returns of 14.9%, 14.8% and 7.3%, respectively. EVUAX has a Zacks Mutual Fund Rank #2.

Fidelity Select Medical Delivery Portfolio (FSHCX - Free Report) invests the bulk of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. The fund focuses on acquiring common stocks of both U.S. and non-U.S. companies. It seeks growth of capital.

FSHCX has an annual expense ratio of 0.78%, lower than the category average of 1.33%. The fund has year-to-date, one-year and three-year annualized returns of 17.1%, 19.6% and 11.1%, respectively. FSHCX has a Zacks Mutual Fund Rank #1.

T. Rowe Price Financial Services (PRISX - Free Report) seeks both capital growth and current income. The majority of its assets are invested in financial services sector companies. It may also purchase securities of companies involved in providing financial software. The fund uses fundamental bottom-up analysis in order to select securities.

PRISX has an annual expense ratio of 0.88%, lower than the category average of 1.42%. The fund has year-to-date, one-year and three-year annualized returns of 8.7%, 26% and 10.2%, respectively. PRISX has a Zacks Mutual Fund Rank #1.

Fidelity Select Transportation (FSRFX - Free Report) seeks capital growth. FSRFX invests a large part of its assets in securities of companies involved in design, manufacture and sale of transportation equipment as well as providing transportation services. The non-diversified fund invests in both U.S. and non-U.S. companies.

FSRFX has an annual expense ratio of 0.82%, lower than the category average of 1.20%. The fund has year-to-date, one-year and three-year annualized returns of 5%, 20.9% and 6.8%, respectively. FSRFX has a Zacks Mutual Fund Rank #1.

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