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U.S. Service Activity Rebounds in May: 4 Fund Picks

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Per the latest report from the Institute of Supply Management (ISM), service activity for the month of May surged for the 112th month on the trot, indicating that the broader economy is on track for steady growth this year. Notably, 16 of all 17 non-manufacturing industries reported expansion.

Needless to say, that the service sector picked up despite trade war and global economic woes. Under such circumstances, investing in mutual funds having significant exposure to services-related companies may prove to be prudent.

Service Sector Rebounds From Two-and-Half-Year Low

The Institute of Supply Management reported on Jun 5 that non-manufacturing activity for May came in at 56.9%, surpassing the consensus estimate of 55% and the previous month’s figure of 55.5%. A reading above 50 indicates expansion in the sector. And a reading above 55% is considered phenomenal.

Firms across America complained that trade war woes and threats pertaining to the imposition of newer tariffs have weighed on the service sector. But, service activity remained robust despite such hindrances. Paucity of skilled labor was pointed out as another hindrance to development. However, a flourishing domestic economy and robust demand more than made up for such adversities.

Further, an uptick in the business activity in May also supported growth for the service sector.

Spur in Business Activity and New Orders

Non-manufacturing inventories index increased 54% in May. This was higher than 51.5% that the metric had hit in April. Moreover, the Business Activity Index registered growth of 61.2% in May to report growth in business activity for the 118th consecutive month. Notably, 12 of the surveyed industries reported an increase in business activity for the month.

Looking at other positive developments from the report, the non-manufacturing New Orders Index surged to 58.6%. This represents growth for 91 straight months that too at an accelerated rate when compared with April. Finally, the non-manufacturing Employment Index surged to 58.1%, expanding for the 63rd straight month.

4 Best Choices

We have, thus, selected four service related mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. 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).

Fidelity Select Leisure Portfolio (FDLSX - Free Report) fund invests a bulk of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure and recreation industries. The fund seeks growth of capital and invests both in U.S. and non-U.S. companies.

This Sector – Other product has a track of positive total returns for more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 14.5% and 10.6%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FDLSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.76%, which is below the category average of 1.15%.

Fidelity Select Banking (FSRBX - Free Report) fund seeks appreciation of capital. FSRBX normally invests at least 80% of assets in common stocks of companies principally involved in banking. The fund invests in both U.S. and non-U.S. companies.

This Sector-Finance 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 5.6% and 14.6%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSRBX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.77%, which is below the category average of 1.44%.

Fidelity Select Health Care Services Portfolio (FSHCX - Free Report) fund invests a large chunk of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. FSHCX seeks appreciation of capital. The fund invests in securities of both U.S. and non-U.S. companies.

This Sector – Health product has a track of positive total returns for more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 10.3% and 11%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FSHCX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.76%, which is below the category average of 1.22%.

T. Rowe Price Financial Services (PRISX - Free Report) fund seeks both capital growth and current income. The majority of its assets are invested in financial services sector 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 more than 10 years. Specifically, the fund's returns over the three and five-year benchmarks are 12.7% and 8.9%, respectively. To see how this fund performed compared to 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 0.87%, which is below the category average of 1.38%.

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