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Big Banks Post Robust Q4 Earnings: 3 Mutual Funds to Buy

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The financial sector has performed favorably recently on the back of encouraging earnings results. Both JPMorgan Chase & Co. (JPM - Free Report) and Bank of America Corporation (BAC - Free Report) have posted better-than-expected earnings results. Strong rise in investment banking fees and stable equity trading income supported the top-line of both banks, including investment bank Morgan Stanley (MS - Free Report) .

After the passage of the much-awaited Tax Cuts and Jobs Act last year, several major banks have announced big one-time charges related to the new tax law. However, major regional banks like JPMorgan and Bank of America managed to generate quarterly income despite bearing huge tax charges. Further in the near future, reduction in corporate taxes will continue to boost earnings of these banks as they will be able to retain more of their revenues.

All the three aforementioned banks have not only posted upbeat earnings but also managed to hold a Zacks Rank #2 (Buy), highlighting a positive sentiment over them. Following these promising trends, investing in financial mutual funds with a significant holding in these companies will be a prudent decision.

Q4 Earnings in Focus

Both JPMorgan and Bank of America reported fourth-quarter earnings per share (EPS) and revenues, which beat the respective Zacks Consensus Estimate. Additionally, both the top and bottom-line of the two big banks rose substantially. Solid loan growth and higher interest rates supported net interest income growth. Further, rise in investment banking fees and stable equity trading income supported revenues.

Additionally, with EPS and revenues beat, Morgan Stanley registered strong revenues growth on the back of effective wealth and asset management. Higher asset management fees, net interest income and transactional revenues boosted the company’s revenues from wealth and investment management.(Read More)

Tax Charge: Short-Term Pain, Long-Term Gain

In its quarterly earnings results, JPMorgan highlighted a one-time tax related charge of $2.4 billion, which it had to bear during the quarter. However, optimism remains that gains from lower tax rates will aid profitability in the quarters ahead. Most of the major financial companies bore a one-time charge related to the new tax law in the last quarter of 2017, but a low corporate tax rate of 21%is expected to boost gains for these banks, as they face a high tax burden that makes them big gainers when tax rates go down.

Moreover, despite the tax charge finance sector is dominating this early sample of results, per the latest Earnings Outlook. Total earnings for the 37.5% of the sector’s market cap in the S&P 500 that have reported results already are up 1.9% on 3% higher revenues, with 90% beating EPS estimates and 50% beating revenue estimates. (Read More)

In the past three months, the financial sector jumped 12%, remaining one of the best performers among the S&P 500 sectors. Additionally, mutual funds related to this sector registered strong returns. According to Morningstar, financial mutual funds have returned 10.2% over the last three months.

Buy These 3 Mutual Funds

Here, we have selected three mutual funds that have significant exposure to the financial sector and have two biggest financial companies in terms of market-cap, JPMorgan and Bank of America as one of its top four holdings. Moreover, these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). 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.

These funds have encouraging three-month and one-year annualized returns and minimum initial investment is within $5000. Also, each of these funds has a low expense ratio.

Fidelity Select Financial Services Portfolio (FIDSX - Free Report) invests the majority of its assets in common stocks of companies involved in offering financial services to industry and consumers. FIDSX seeks capital growth for the long run. Before investing in financial companies, the fund measures their industry position and financial condition.

The fund has three-month and one-year annualized returns of 12.4% and 29.3%, respectively, and an expense ratio of 0.77% as compared to the category average of 1.52%. FIDSX has a Zacks Mutual Fund Rank #1. Further, as of the last filing, Bank of America was in the top four holdings for FIDSX.

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 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.

The fund has three-month and one-year annualized returns of 9.6% and 26.7%, respectively, and an expense ratio of 0.93% as compared to the category average of 1.52%. PRISX has a Zacks Mutual Fund Rank #1. Further, as of the last filing, JPMorgan was in the top four holdings for PRISX.

Fidelity Advisor Financial Services Fund A (FAFDX - Free Report) seeks growth of capital for the long run. FAFDX invests in securities issued by companies that offer financial services to consumers and industries. The fund invests in securities of both U.S. and non-U.S. companies.  

The fund has three-month and one-year annualized returns of 12.3% and 28.9%, respectively, and an expense ratio of 1.12% as compared to the category average of 1.52%. FAFDX has a Zacks Mutual Fund Rank #2. Further, as of the last filing, Bank of America was in the top four holdings for FAFDX.

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