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4 Utility Funds to Take Refuge From Market Mayhem

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After registering record declines on Oct 10, all the three key U.S. indexes posted significant losses for the week ended Oct 12. Higher bond yields and renewed fears of a trade war may find investors scurrying toward safe-haven sectors that have already emerged as preferred investments.

One of the most-popular, safe-haven sectors is utilities. This sector comprises companies that provide telephone, gas, water and electricity services. In this context, investors looking for stable dividend and interest income can opt to invest in mutual funds having significant exposure in utilities stocks.

Indexes on Choppy Ground

The second week of October was the worst one since March. All three major stock indexes — the Dow, S&P 500 and Nasdaq Composite — declined 4.2%, 4.1% and 3.7%, respectively. For both the Dow 30 and S&P 500, it was the third straight weekly loss, while Nasdaq Composite posted its second successive weekly decline. Notably, the S&P 500 posted its longest weekly drop since the Brexit referendum in June 2016. Consequently, CBOE Volatility index (VIX) reached its highest level since February.

A sudden increase in long-term bond yields weigh on the equity market as a rapid increase in bond yields boost borrowing costs. Last week’s stock market mayhem started due to spike in the yields of 10-year and 30-year U.S. Treasury note buoyed by a series of strong economic data.

Additionally, the Fed has already raised its federal funds rate for the third time this year. The Fed’s aggressive rate hike approach invited criticism from President Trump, with the President saying that “the Fed is making a mistake.” A high interest rate environment along with continued trade war tensions between the United States and China weighed on investor sentiment and resulted in this carnage.

Why Buy Utilities Funds?

Among the safe-haven sectors, utilities could be good investments because this segment offers protection against a downward trending market.Investors with a conservative mindset looking for stable current income would do well to consider utility funds. They are used as defensive instruments, which protect investments during a market downturn. This is because demand for essential services such as those provided by utilities remains unchanged even during difficult times.

Moreover, most of the utilities maintain a high level of monopoly across their geographic markets. This in turn helps these companies retain their profitability and continued existence. Constant demand for utilities-related services ensures long-term sustainability for utilities mutual funds.

Buy These 4 Utility Stocks

Rising bond yields and trade war fears make utility funds a good investment. This is borne out by the fact that Utilities Select Sector SPDR Fund (XLU) has gained 1.3% in the past three months. Additionally, mutual funds related to this sector registered returns of 1.6% during the same period.

Banking on this encouraging backdrop, we have selected four utilities mutual funds that flaunt a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). 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 should one be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

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

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 Utilities Growth (FSUTX - Free Report) normally invests a large chunk of its assets in common stocks of companies mainly involved in the utilities sector and companies that generate the majority of their revenue from multiple utilities operations. FSUTX seeks growth of capital by investing in both U.S. and non-U.S. companies.

FSUTX carries an expense ratio of 0.77% compared with the category average of 1.25%. Moreover, FSUTX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 11.6%.

FSUTX has a Zacks Mutual Fund Rank #1. Further, Douglas Simmons is the fund manager of FSUTX since 2006.

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 service providers. EVUAX also invests around 35% of its assets in convertible debentures of utilities and telecom companies.

EVUAX carries an expense ratio of 1.14% compared with the category average of 1.25%. Moreover, EVUAXrequires a minimal initial investment of $1,000. The fund has one-year annualized returns of 5.5%.

EVUAX has a Zacks Mutual Fund Rank #2. Further, Timothy P. O'Brien is the fund manager of EVUAX since 2002.

Putnam Global Utilities A (PUGIX - Free Report) invests mostly in common stocks of large- and mid-cap companies across the globe. PUGIX invests a major portion of its assets in securities of companies predominantly involved in the utilities industry. The fund seeks capital growth and current income.

PUGIX carries an expense ratio of 1.23% compared with the category average of 1.25%. Moreover, PUGIX requires a minimal initial investment of $500. The fund has one-year annualized returns of 2.2%.

PUGIX has a Zacks Mutual Fund Rank #2. Further, William Rives is the fund manager of PUGIX since 2017.

Fidelity Telecom and Utilities (FIUIX - Free Report) seeks returns through growth of capital and income. FIUIX generally invests a major portion of its assets in securities of companies from both telecom and utilities. The fund invests not only in U.S. companies but also in non-U.S. companies.

FIUIX carries an expense ratio of 0.54% compared with the category average of 1.25%. Moreover, FIUIX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 9.6%.

FIUIX has a Zacks Mutual Fund Rank #2. Further, Douglas Simmons is the fund manager of FIUIX since 2005.

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