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4 Mutual Funds to Benefit From a Likely Rate Hike in June

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Minutes from the Fed’s last meeting made it clear that the central bank is set to hike interest rates gradually this year. However, a June hike is in the offing. The Federal Open Market Committee (FOMC) believes that encouraging economic conditions, even as inflation nears the 2% level, would make conditions appropriate for further rate hikes.

Moreover, a tight labor market and steadily rising wages make the conditions ideal for gradually hiking interest rates. Under conditions in which interest rates are likely to shoot up, investing in mutual funds from the financial sector seems prudent.

Hike in June is Imminent

In the recently concluded Fed meet on May 2, the FOMC unanimously agreed to hold the interest rate steady. However, the committee acknowledged rising levels of inflation. The members noted that on a 12-month basis, overall inflation, including core inflation, inched close to 2%.

The minutes from the meeting, indicated that though the rate hikes would be gradual this year, a hike is inevitable in June. This is because most of the members stated that it would “soon be appropriate” to hike rates. Further, the minutes also stated that an upsurge in inflation would prove to be helpful. Notably, CME’s FedWatch Toolpredicts 100% probability of a hike in interest rate levels in June.

Fed’s Harker Backs More Rate Hikes in 2018

On May 21, Philadelphia Fed President Patrick Harker stated that rising inflation levels in the United States should encourage the Fed to hike interest rates by two or maybe three more times this year. He further stated that the next hike could take place as early as in June.

He reasoned that since inflation is fast closing in on the targeted 2% level, a hike in interest rate should not be delayed. Notably, the PCE price index rose to an annual rate of 2% in March from 1.7% in February.

4 Best Mutual Funds to Buy Now

Given such positives, we have highlighted four financial mutual funds poised to gain significantly from a rising rate environment in the United States. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and one-year returns. Additionally, the minimum initial investment is within $5000.

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.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Vanguard Financials Index Admiral (VFAIX - Free Report) tracks the performance of MSCI US Investable Market Index (IMI)/Financials 25/50 using an indexing investment approach. The fund invests the majority of its assets in stocks that are part of this index. Such investments include large-cap, mid-cap and small-cap companies from the financial sector that are categorized under Global Industry Classification Standard (GICS).

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VFAIXhas a Zacks Rank #1 and an annual expense ratio of 0.10%, which is below the category average of 1.39%. The fund has three and five-year returns of 14.3% and 14.3%, respectively.

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.

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PRISXhas a Zacks Rank #2 and an annual expense ratio of 0.85%, which is below the category average of 1.39%. The fund has three and five-year returns of 11.3% and 13.7%, respectively.

Prudential Jennison Financial Services A (PFSAX - Free Report) invests a heavy portion of its assets in equity securities of asset management companies, securities/brokerage firms, mortgage banking companies, banks, insurance companies, industrial finance companies and leasing companies.

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PFSAX has a Zacks Rank #2 and an annual expense ratio of 1.37%, which is below the category average of 1.39%. The fund has three and five-year returns of 3% and 4.5%, respectively.

Fidelity Advisor Financial Services A (FAFDX - Free Report) invests the majority of assets in securities of companies engaged in providing financial services to consumers and industry. FAFDX invests in domestic and foreign issuers.

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FAFDX has a Zacks Rank #2 and an annual expense ratio of 1.37%, which is below the category average of 1.39%. The fund has three and five-year returns of 10.5% and 12.2%, respectively.

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