Back to top

4 Funds to Buy in the Wake of Renewed US-China Trade War

Read MoreHide Full Article

President Trump recently claimed that China has broken the trade deal, while Chinese officials threatened to retaliate if Washington imposes additional tariffs on Chinese imports. Such warnings about counter measures roiled markets. In such a murky scenario, U.S. manufacturing companies that have significant business in China are likely to feel the impact, but not service providers as they aren’t on the forefront to bear the tariff brunt.

Therefore, at present, investing in service firms could be beneficial for investors.

Fresh US-China Trade Tensions

Global equity markets took a dip following Trump’s threat this weekend to escalate tariffs on $200 billion of Chinese goods. The president’s tweets came right ahead of a vital week of negotiations that could have possibly put an end to the months-long trade war between the United States and China. Trade negotiations are currently ongoing in Washington DC.

If Trump follows through with his resolution, tariffs on $200 billion worth of Chinese products could soon be raised from the current 10% to 25% beginning midnight, May 10. But what stands to rattle the financial markets further is China’s resolution to fight back. Beijing has already signaled that it would retaliate in kind.

This would mean that American companies that largely operate in China are likely to be affected as Chinese tariffs take effect on their products.

Invest in Sectors With Less Exposure to Trade Policy

In such a scenario, it makes sense to minimize investments in U.S. goods companies that have more exposure to international trade policies and instead invest in services companies that have more domestic operations.

According to a Goldman Sachs report, “Services stocks have less foreign input costs that might be subject to tariffs and are also less exposed to potential trade retaliation given they have less non-U.S. sales exposure than Goods companies. Services stocks have faster sales and earnings growth, more stable gross margins, and stronger balance sheets.”

In addition, services companies have better sales and earnings growth. Such firms also have stronger balance sheets and gross margins that are more stable, the investment bank noted.

For example, services companies such as Google, Amazon and Wells Fargo have lesser foreign input costs exposed to tariffs and should therefore outperform. On the other hand, goods companies like Apple, which suffered greatly in fourth-quarter 2018 due to low iPhone demand in China, could witness the cycle being repeated.

In fact, business services have been faring better than the manufacturing sector, which is evident from April’s impressive jobs report.

Business Services Created Most New Jobs in April

Professional and business services took the center stage in April’s strong jobs gains. According to the Labor department, the sector added a whopping 76,000 new jobs last month, outshining manufacturing by far and large, which merely added 4000 new jobs.

The annualized job additions of these sectors have a significant difference as well. Business services added more than twice as many jobs as manufacturing, with the former adding 535,000 jobs over the past 12 months while the latter added only an average of 22,000 jobs a month in the same time frame.

The stark difference in new positions created indicates rapid growth in the business services sector, which again, marks it ideal for investments right now.

Our Choices

Given the encouraging factors propelling the professional and business services sector, here are four mutual funds you could consider investing in. We have selected funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5,000.

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).

Fidelity Select Environment and Alternative Energy Portfolio (FSLEX - Free Report) fundaims for capital appreciation. The fund invests the majority of its assets in securities of companies that provide business services related to alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies or other environmental support etc. The non-diversified fund mostly invests in common stocks of companies. FSLEX invests in U.S. and non-U.S. issuers alike.

This Zacks sector – Other product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSLEX has a Zacks Mutual Fund Rank #1. The fund has an annual expense ratio of 0.87%, which is below the category average of 1.17%. The fund has three and five-year returns of 13.8% and 8.5%, respectively. The minimum initial investment for the fund is $2500.

T. Rowe Price Financial Services Fund (PRISX - Free Report) aims for long-term capital appreciation and a decent level of income. The fund primarily invests its assets in common stocks of companies in the financial sector. PRISX is a non-diversified fund. The fund may also invest in companies that offer financial software that generate significant revenues from their business in the financial sector.

This Zacks sector – Finance product has a history of positive total returns for more than 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. The fund has an annual expense ratio of 0.85%, which is below the category average of 1.44%. The fund has three and five-year returns of 15.6% and 10.1%, respectively. The minimum initial investment for the fund is $2500.

Fidelity Select Financial Services Portfolio (FIDSX - Free Report) fund aims for capital growth.The fund primarily invests in common stocks of companies that are engaged in services in the financial sector. The non-diversified fund invests in U.S. and non-U.S. issuers alike.

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

FIDSX has a Zacks Mutual Fund Rank #2. The fund has annual expense ratio of 0.76%, which is below the category average of 1.44%. The fund has three and five-year returns of 13.9% and 9.1%, respectively. The minimum initial investment for the fund is $2500.

Fidelity Select Health Care Services Portfolio (FSHCX - Free Report) fund mostly invests in common stocks of companies that are primarily engaged in the ownership or management of hospitals, nursing homes, health maintenance organizations and other companies that offer health care services. The non-diversified fund aims for capital growth. It may also invest in American and foreign issuers alike.

This Zacks sector – Health product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSHCXhas a Zacks Mutual Fund Rank #2. The fund has an annual expense ratio of 0.76%, which is below the category average of 1.26%. The fund has three and five-year returns of 10.2% and 12.2%, respectively. The minimum initial investment for the fund is $2500.

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 >>

Published in