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U.S. service sector activity staged a rebound in January after two consecutive months of decline and reached its highest level in around two and half years. Strong upside in business activity, increase in new orders and rise in employment facilitated this performance. Steady growth in 15 out of the 18 key non-manufacturing industries boosted service sector activity last month.

Following this development, the service sector looks quite attractive and is expected to expand further. Strong growth in service activity boosted investor sentiment. In this context, investing in mutual funds having significant exposure to services-related companies may prove prudent at this point.

ISM Services Scale New High

The Institute of Supply Management (ISM) reported that its ISM Services Index increased 3.9% from last December to 59.9% in January – the highest since August 2005. The increase was also more than the consensus estimate of a rise to 56.8%.To date, the U.S. services index has posted expansion for 96 straight months. Continued expansion in the sector, which accounts for at least two-third of domestic economic activity, bodes well for investors.

After mostly disappointing December performance, business activity, new orders and employment registered growth in January, which in turn gave a boost the overall service sector. Also, most of the industries reportedly gave a positive opinion on their present business conditions and the economy in general. 

Business Activity & New Orders Expand

The business activity index rose from 57.8% in December to 59.8% in January, registering its 102nd consecutive month of growth. While 11 industries reported growth, only three experienced a decline in business activity. January not only experienced growth in business activity but also in new orders for the 84th successive month.

New order count rose from 54.5% in December to 62.7% in January, its highest level in seven years. Also, 14 industries experienced expansion whereas only four witnessed contraction in new orders. Additionally, employment activity advanced to 61.6% in January from 56.3% in the preceding month. Here, 13 industries reported an increase in employment, while two witnessed a slump.

Buy These 5 Mutual Funds

Following these developments in the services sector, investors may consider buying mutual funds that focus on the said sector. We have selected five mutual funds that flaunt a Zacks Mutual Fund Rank #1 (Strong Buy) and have encouraging 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 a bulk of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure and recreation industries. The fund seeks growth of capital and invests both in U.S. and non-U.S. companies.

FDLSX has an annual expense ratio of 0.79%, which is below the category average of 1.41%. The fund has three-year annualized returns of 12%. It has the heaviest exposure in the consumer cyclical sector.

Fidelity Select Health Care Services Portfolio (FSHCX - Free Report) invests a large chunk 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. FSHCX seeks appreciation of capital. The fund invests in securities of both U.S. and non-U.S. companies.

FSHCX has an annual expense ratio of 0.78%, which is below the category average of 1.33%. The fund has three-year annualized returns of 11%. It has the biggest exposure in the healthcare services sector.

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%, which is below the category average of 1.52%. The fund has three-year annualized returns of 12.5%. It has the heaviest exposure in the financial services sector.

American Century Utilities Fund Investor (BULIX - Free Report) invests a huge portion of its assets in equity securities of companies engaged in the utilities sector. BULIX seeks appreciation of income and capital for the long run. The fund managers generally use qualitative and quantitative management techniques.

BULIX has an annual expense ratio of 0.67%, which is below the category average of 1.19%. The fund has three-year annualized returns of 3.1% and has the highest exposure in the utilities sector.

Vanguard Precious Metals and Mining (VGPMX - Free Report) invests heavily in stocks of both domestic and foreign companies whose primary operations concern precious metals including gold. This fund may also invest around one-fifth of its assets in gold, silver and other precious metals coins and bullion.

VGPMX has an annual expense ratio of 0.43%, which is below the category average of 1.31%. The fund has three-year annualized returns of 2.2%. It has the heaviest exposure in basic materials sector that mostly focuses on mining related service providers.

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