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3 Mutual Funds to Benefit From Stress Test Results

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On Jun 28, the Federal Reserve announced the results of its annual tests to assess the financial strength of the largest banks in the United States. Termed as stress tests, the Fed conducts a review of these banks under hypothetically created financial crises and recessions.

Results showed that 18 banks exhibited financial strength by showing that they had enough capital to withstand a potential economic downturn. These include Bank of America (BAC - Free Report) , PNC Financial Services Group (PNC - Free Report) , Bank of New York Mellon (BK - Free Report) and State Street (STT - Free Report) .

However, the Fed did not seem impressed with the way Credit Suisse (CS - Free Report) assesses its risks and therefore issued the Swiss bank a conditional non-objection, which requires the bank to keep its capital distribution capped at 2018 levels.

Banks which qualified received permission to redistribute capital through share repurchase programs, dividends or other suitable means. Positive results from the stress test also indicate the ability of the U.S. banks to offer higher returns on investment.

Value Investors to Gain Immensely from Bank Stocks

Ever since the end of the last recession in 2009, it has been observed that investors targeting value stocks have focused more on banks. The reason for this is pretty simple. Value investing fundamentally screens stocks that have lower price-to-earnings ratio (P/E) than that of the broader market average.

Moreover, diversified banks have average forward P/E ratio of less than 10 compared with the market average of around 15. This is what makes bank stocks attractive. Moreover, it is largely expected that P/Es for large consumer banks will continue to lag the industry average this year as well.

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 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).

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 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 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 0.87%, which is below the category average of 1.40%. The fund has three and five-year returns of 12.7% and 8.9%, respectively.

JHancock Regional Bank A (FRBAX - Free Report) fund invests the lion’s share of its assets in stocks of regional banks and other lending institutions, including commercial and industrial banks, savings and loans associations and bank holding companies.

This 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.

FRBAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.21%, which is below the category average of 1.40%. The fund has three and five-year returns of 9.6% each, respectively.

Fidelity Select Banking (FSRBX - Free Report) fund seeks appreciation of capital. FSRBX normally invests at least 80% of its 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. 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 #2 and an annual expense ratio of 0.77%, which is below the category average of 1.40%. The fund has three and five-year returns of 9.1% and 6.9%, respectively.

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