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3 Utilities Funds to Buy on Widening Yield Curve Inversion

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A rally in global bonds weighed on yields on May 29. Long-term government debt yields came in below short-term notes and bills. While, the 3-month bill yield increased to 2.362%, the yield on 10-year Treasury note fell to 2.26%, its lowest level since September 2017. The yield on the 10-year note, by the way, rose just 3 basis points on May 30 to settle at 2.27%, which is still low.

Such a phenomenon, also called the yield curve inversion, is an indicator of an impending recession. As a matter of fact, the yield curve inversion between 3-month Treasury bill and the 10-year Treasury note increased to its highest levels since the financial crisis.

Meanwhile, trade tensions between the United States and China escalated further on May 29 after China’s state media hinted that the country was considering using its supremacy in rare earth minerals as a weapon in the trade war against America. China owns about 40% of the global rare earth mineral resources. This “veiled threat” by the Chinese media targets America’s technology and defense industries.

Such events often 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.

Why Not Invest in Bonds Instead?

The current interest rate environment, in which long-term debt instruments have lower yields compared to their short-term counterparts, investors prefer holding cash. This is because the future appears bleak at this point and investing in short-term securities would lead to momentary gains provided the Fed does not lower interest rates in the near term.

However, there is widespread speculation among market-watchers that weakness in the economy might lead to lowering of interest rates by the Fed. However, this hypothesis is just arising out of skittishness in the current scenario. Also, it has been observed that historically, inversions of the yield curve have led to many a recession in the United States.

Meanwhile, bond markets might not be the best of one’s investment options right now. One should rather consider betting on utilities stocks because they provide higher dividends compared to falling long-term treasury yields.

3 Best Choices

Given such circumstances, we have highlighted three utilities mutual funds that are poised to gain. These funds also 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 $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).

Wells Fargo Utility and Telecommunications A (EVUAX - Free Report) fund 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.

This Sector – Utilities product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 11.4% and 8.1%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

EVUAXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 1.02%, which is below the category average of 1.07%.

Fidelity Telecom and Utilities (FIUIX - Free Report) fund 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.

This Sector – Utilities product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 9.9% and 8.2%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FIUIXhas a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.70%, which is below the category average of 1.07%.

American Century Utilities Fund Investor Class (BULIX - Free Report) aims for current income and long-term growth of capital and income. The fund invests most of its net assets in equity securities of companies engaged in the utilities industry. The portfolio managers use quantitative and qualitative management techniques along with risk controls to create the portfolio of the fund.

This Sector – Utilities product has a history of positive total returns for over 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 6.5% and 7.1%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

BULIXhas a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.67%, which is below the category average of 1.07%.

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