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3 Financial Funds to Buy in A Rising Rate Environment
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On Oct 3, yields on benchmark Treasury Notes hit record levels following a slew of impressive economic reports. The ISM services index hit an all-time high in August, while factory orders posted the biggest monthly gain since September 2017.
Finally, after the release of better-than-expected jobs data on Oct 5, the yield on the 10-year Treasury note increased by 3 basis points to 3.227%, its highest level since May 2011.
Further, on Sep 26, at the end of its two-day meet, the Fed hiked interest rates for the third time this year. Under such circumstances where interest rates are expected to remain high, betting on financial mutual funds would be judicious.
What Caused the Rise?
Needless to say, strong economic fundamentals have propelled interest rates higher. The labor market is in excellent shape, with unemployment rate falling to a 49-year low of 3.7% in September, the lowest since December 1969, per the Labor Department. Another key barometer of the U.S. economy has hit post-recession high. The ISM services index climbed to 61.6% in September from 58.5% in August, its second-highest reading.
Moreover, after the end of the two-day meet last month, Fed Chairman Jerome Powell announced that the federal funds rate would be hiked by 25 basis points to 2-2.25%. For the record, the benchmark rates in the United states are currently at the highest levels since October 2008.
Financial Companies to Benefit
With the Fed raising interest rates and hinting at further hikes in the near term, financials stands to gain. Higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Insurers, by the way, derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a rise in interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins. (Read More)
3 Best Mutual Funds to Buy Now
Given such positives, we have highlighted three 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.
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.
VFAIX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.10%, which is below the category average of 1.40%. The fund has three and five-year returns of 16.7% and 14.6%, 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 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.
PRISX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.85%, which is below the category average of 1.40%. The fund has three and five-year returns of 13.2% and 13.4%, respectively.
Prudential Jennison Financial Services A (PFSAX - Free Report) invests a huge 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 Mutual Fund Rank #2 and an annual expense ratio of 1.37%, which is below the category average of 1.40%. The fund has three and five-year returns of 9.1% and 5.5%, respectively.
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3 Financial Funds to Buy in A Rising Rate Environment
On Oct 3, yields on benchmark Treasury Notes hit record levels following a slew of impressive economic reports. The ISM services index hit an all-time high in August, while factory orders posted the biggest monthly gain since September 2017.
Finally, after the release of better-than-expected jobs data on Oct 5, the yield on the 10-year Treasury note increased by 3 basis points to 3.227%, its highest level since May 2011.
Further, on Sep 26, at the end of its two-day meet, the Fed hiked interest rates for the third time this year. Under such circumstances where interest rates are expected to remain high, betting on financial mutual funds would be judicious.
What Caused the Rise?
Needless to say, strong economic fundamentals have propelled interest rates higher. The labor market is in excellent shape, with unemployment rate falling to a 49-year low of 3.7% in September, the lowest since December 1969, per the Labor Department. Another key barometer of the U.S. economy has hit post-recession high. The ISM services index climbed to 61.6% in September from 58.5% in August, its second-highest reading.
Moreover, after the end of the two-day meet last month, Fed Chairman Jerome Powell announced that the federal funds rate would be hiked by 25 basis points to 2-2.25%. For the record, the benchmark rates in the United states are currently at the highest levels since October 2008.
Financial Companies to Benefit
With the Fed raising interest rates and hinting at further hikes in the near term, financials stands to gain. Higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
Insurers, by the way, derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a rise in interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins. (Read More)
3 Best Mutual Funds to Buy Now
Given such positives, we have highlighted three 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.
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.
VFAIX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.10%, which is below the category average of 1.40%. The fund has three and five-year returns of 16.7% and 14.6%, 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 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.
PRISX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.85%, which is below the category average of 1.40%. The fund has three and five-year returns of 13.2% and 13.4%, respectively.
Prudential Jennison Financial Services A (PFSAX - Free Report) invests a huge 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 Mutual Fund Rank #2 and an annual expense ratio of 1.37%, which is below the category average of 1.40%. The fund has three and five-year returns of 9.1% and 5.5%, respectively.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>