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3 Financial Mutual Funds to Buy as Interest Rates Stay High
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The Federal Reserve started raising interest rates in March 2022 to fight a four-decades-high inflation and continued on the path for 10 straight policy meetings. It last raised the rate in July 2023 after announcing a pause in June. At that point, economic indicators from various sectors suggested that the Fed’s tight monetary policy decisions were taking effect. Inflation numbers were also indicating a gradual slowdown. The Fed had finally taken cognizance.
However, the cheer was short-lived. Following a spike in August inflation metrics due to fuel prices and robust numbers from various sectors led by the jobs market, the general consensus has been that the Fed officials might have to revert to policy tightening. This is because inflation, albeit down from historic levels, is still above the Fed’s target rate of 2%. Fed Chair Jerome Powell, while presiding over the September meeting, which did not raise the rates, has warned that he expects at least another hike before the year ends. Currently, it rests in the range of 5.25-5.5%.
It is likely that we have not yet reached the end of the rate-hike cycle. Also, per current expectations, a rate cut is not expected before the end of 2024. So, in either case, interest rates are staying high for now.
When interest rates are high, banks and other financial institutions generally see higher profitability due to increased lending rates. The gap between such lending rates is considered a long-term asset for banks. Also, short-term liabilities such as deposits increase and boost net interest margins. Stocks of banks, insurance companies and other financial institutions go up with continuous interest rate hikes.
For the same reason, financial mutual funds provide much-required growth in a market where interest rate hikes are expected to continue. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have thus selected three financial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive three-year and five-year annualized returns, and minimum initial investments within $5000 as well as carry a low expense ratio. We have also made sure that at least 80% of the fund is invested in the financial sector.
T. Rowe Price Financial Services (PRISX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stock issued by companies engaged in financial services, and service providers to financial services companies. PRISX advisors generally invest in quality companies with good chances of appreciation.
Matt J. Snowling has been the lead manager of PRISX since Jun 30, 2021, and 86.7% of the fund is invested in the financial sector. Three top holdings for PRISX are 4.5% in Chubb, 4.4% in Bank of America and 4.1% in Wells Fargo.
PRISX’s 3-year and 5-year annualized returns are 15.7% and 7.3%, respectively. Its net expense ratio is 0.83% compared to the category average of 1.08%. PRISX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Davis Financial (RPFGX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stock issued by companies engaged in providing financial services to consumers and industry. RPFGX offers dividends and capital gains annually.
Christopher Cullom Davis has been the lead manager of RPFGX since Dec 31, 2013, and 89.1% of the fund is invested in the financial sector. Three top holdings for RPFGX are 9.4% in Capital One Financial, 7.6% in Wells Fargo and 7.2% in JPMorgan Chase.
RPFGX’s 3-year and 5-year annualized returns are 13.9% and 4.4%, respectively. Its net expense ratio is 0.95% compared to the category average of 1.08%. RPFGX has a Zacks Mutual Fund Rank #2.
Fidelity Advisor Financials Fund (FAFDX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stocks issued by companies providing financial services to consumers and industry.
Matt Reed has been the lead manager of FAFDX since May 31, 2019, and 89.9% of the fund is invested in the financial sector. Three top holdings for FAFDX are 5.5% in Wells Fargo, 5.2% in Bank of America and 3.9% in U.S. Bancorp.
FAFDX’s 3-year and 5-year annualized returns are 15% and 6.1%, respectively. Its net expense ratio is 1.04% compared to the category average of 1.08%. FAFDX has a Zacks Mutual Fund Rank #2.
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3 Financial Mutual Funds to Buy as Interest Rates Stay High
The Federal Reserve started raising interest rates in March 2022 to fight a four-decades-high inflation and continued on the path for 10 straight policy meetings. It last raised the rate in July 2023 after announcing a pause in June. At that point, economic indicators from various sectors suggested that the Fed’s tight monetary policy decisions were taking effect. Inflation numbers were also indicating a gradual slowdown. The Fed had finally taken cognizance.
However, the cheer was short-lived. Following a spike in August inflation metrics due to fuel prices and robust numbers from various sectors led by the jobs market, the general consensus has been that the Fed officials might have to revert to policy tightening. This is because inflation, albeit down from historic levels, is still above the Fed’s target rate of 2%. Fed Chair Jerome Powell, while presiding over the September meeting, which did not raise the rates, has warned that he expects at least another hike before the year ends. Currently, it rests in the range of 5.25-5.5%.
It is likely that we have not yet reached the end of the rate-hike cycle. Also, per current expectations, a rate cut is not expected before the end of 2024. So, in either case, interest rates are staying high for now.
When interest rates are high, banks and other financial institutions generally see higher profitability due to increased lending rates. The gap between such lending rates is considered a long-term asset for banks. Also, short-term liabilities such as deposits increase and boost net interest margins. Stocks of banks, insurance companies and other financial institutions go up with continuous interest rate hikes.
For the same reason, financial mutual funds provide much-required growth in a market where interest rate hikes are expected to continue. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have thus selected three financial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), have positive three-year and five-year annualized returns, and minimum initial investments within $5000 as well as carry a low expense ratio. We have also made sure that at least 80% of the fund is invested in the financial sector.
T. Rowe Price Financial Services (PRISX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stock issued by companies engaged in financial services, and service providers to financial services companies. PRISX advisors generally invest in quality companies with good chances of appreciation.
Matt J. Snowling has been the lead manager of PRISX since Jun 30, 2021, and 86.7% of the fund is invested in the financial sector. Three top holdings for PRISX are 4.5% in Chubb, 4.4% in Bank of America and 4.1% in Wells Fargo.
PRISX’s 3-year and 5-year annualized returns are 15.7% and 7.3%, respectively. Its net expense ratio is 0.83% compared to the category average of 1.08%. PRISX has a Zacks Mutual Fund Rank #1. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Davis Financial (RPFGX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stock issued by companies engaged in providing financial services to consumers and industry. RPFGX offers dividends and capital gains annually.
Christopher Cullom Davis has been the lead manager of RPFGX since Dec 31, 2013, and 89.1% of the fund is invested in the financial sector. Three top holdings for RPFGX are 9.4% in Capital One Financial, 7.6% in Wells Fargo and 7.2% in JPMorgan Chase.
RPFGX’s 3-year and 5-year annualized returns are 13.9% and 4.4%, respectively. Its net expense ratio is 0.95% compared to the category average of 1.08%. RPFGX has a Zacks Mutual Fund Rank #2.
Fidelity Advisor Financials Fund (FAFDX - Free Report) seeks long-term growth of capital by investing the majority of its net assets in common stocks issued by companies providing financial services to consumers and industry.
Matt Reed has been the lead manager of FAFDX since May 31, 2019, and 89.9% of the fund is invested in the financial sector. Three top holdings for FAFDX are 5.5% in Wells Fargo, 5.2% in Bank of America and 3.9% in U.S. Bancorp.
FAFDX’s 3-year and 5-year annualized returns are 15% and 6.1%, respectively. Its net expense ratio is 1.04% compared to the category average of 1.08%. FAFDX has a Zacks Mutual Fund Rank #2.
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 >>