The retail and consumer discretionary sectors put up a great show amid ongoing inflationary pressures that saw people cutting down on spending. Higher demand driven by robust spending has been helping the sectors hold their ground during the most challenging times.

This has seen retail sales grow almost every month. In fact, the consumer discretionary sector has been one of the best performers on the S&P 500 Index. The Consumer Discretionary Select Sector SPDR (XLY) has gained 33.2% year to date, which shows the underlying strength in the sector.

Given this situation, it would be prudent to invest in retail and consumer discretionary funds like Fidelity Select Leisure Portfolio (FDLSX Quick QuoteFDLSX - Free Report) , Fidelity Select Consumer Discretionary Portfolio (FSCPX Quick QuoteFSCPX - Free Report) and Fidelity Select Retailing Portfolio (FSRPX Quick QuoteFSRPX - Free Report) . 

Retail Sales, Consumer Spending Rise

Retail sales rose a solid 0.7% to $696.4 billion in July, the Commerce Department reported last month. This was above analysts’ expectations of a rise of 0.4% and the best reading since January 2023.

The jump in July follows a 0.2% rise in June. E-commerce played a major role in driving sales, which grew 1.9%. Also, sales at sporting goods stores and restaurants increased 1.5% and 1.4%, respectively.

The retail sector has been struggling as soaring commodity prices have been making people spend cautiously. The Fed has raised interest rates by 525 basis points since March 2022 to combat sky-high inflation. The Fed’s benchmark rate is now in the range of 5.25-5.5%.

The aggressive interest rate hike stance has seen inflation decline sharply from its peak of 9.1% in June 2022. Also, recently released reports from the Labor Department show that the labor market is finally colling as both job openings and new job additions have slowed substantially over the past few months.

This has raised hopes that the Fed might keep interest rates unchanged in its September meeting. Lower borrowing costs definitely bode well for the retail and discretionary sectors in the near term.

Moreover, despite price pressures, consumers have been spending aggressively as demand remains robust. Consumer spending rose a solid 0.8% in July after a 0.6% increase in July. This came despite personal income rising a modest 0.2%.

3 Best Choices

We have selected three mutual funds with significant exposure to the retail and discretionary sectors. The funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and are poised to gain from the above 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 in identifying potential winners and losers. Unlike most fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also 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 fund invests the majority of its assets in common stocks of companies principally engaged in the design, production, or distribution of goods or services in the leisure industries. FDLSX uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

Fidelity Select Leisure & Entertainment fund has a history of positive total returns for more than 10 years. Specifically, FDLSX has returned nearly 21% and 12.7% over the past three and five-year periods, respectively. FDLSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.74%, which is below the category average of 0.79%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Fidelity Select Consumer DiscretionaryPortfolio fund invests the majority of its assets in common stocks of companies principally engaged in the manufacture or distribution of consumer discretionaries. FSCPX uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

Fidelity Select Consumer Discretionary Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSCPX has returned nearly 8.4% and 9.6% over the past three and five-year periods, respectively. Fidelity Select Consumer Discretionary Portfolio fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.76%, which is below the category average of 0.79%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Fidelity Select Retailing Portfolio fund aims for capital appreciation. FSRPX invests a large portion of its assets in the common stock of companies engaged in merchandising finished goods and services, primarily to individual consumers.

Fidelity Select Retailing Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSRPX has returned nearly 5.9% and 9.6% over the past three and five-year periods, respectively. Fidelity Select Retailing Portfolio fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.72%, which is below the category average of 0.79%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

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