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3 Utility Mutual Funds to Buy Amid Rate Cut Speculation

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The recent retail sales report for May suggests a slowdown in consumer spending in the United States, leading to speculation that the Federal Reserve might lower interest rates this year. According to the U.S. Census Bureau, sales at retailers increased by 0.1% in May, which fell short of expectations of an increase of 0.3%, while April numbers were revised downward to show a 0.2% drop.

The data, combined with a 3.3% year-over-year decrease in inflation levels as indicated by the Consumer Price Index (CPI) and a 3.4% decline in core inflation, points toward a cooling economy.  The CME Groups FedWatch tool currently predicts a 67% chance of a rate cut in September.

In this economic environment, utility mutual funds emerge as a compelling investment option. The utility sector, which includes services like electricity, water and natural gas, is known for its defensive and stable investment. Utility companies typically offer dividends and have lower volatility compared to other sectors, making them appealing to cautious investors during uncertain economic times. A Federal Reserve rate cut benefits utility stocks in several ways. Lower interest rates decrease borrowing costs, thereby boosting their profitability and cash flow.

Thus, from an investment standpoint, we have selected three utility mutual funds, which are expected to hedge your portfolio against any economic downturn and provide attractive returns. Mutual funds, in general, reduce transaction costs and diversify the portfolio without commission charges mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

These mutual funds, by the way, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns, minimum initial investments within $5000, and carry a low expense ratio.

Fidelity Select Utilities (FSUTX - Free Report) fund invests most of its assets in common stocks of companies principally engaged in utility industries and companies, deriving the majority of their revenues from utility operations.

Douglas Simmons has been the lead manager of FSUTX since Oct 2, 2006. Most of the fund’s holdings were in companies like NextEra Energy, Inc (13.1%), Sempra (13.2%) and Constellation Energy Corp (6.6%) as of Feb 29, 2024.

FSUTX’s 3-year and 5-year annualized returns are 12.5% and 10.7%, respectively. Its net expense ratio is 0.73%. FSUTX 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.

American Century Utilities Investor Shares (BULIX - Free Report) fund primarily invests in equity securities of utility companies. BULIX advisors use quantitative and qualitative management techniques as well as risk controls in arriving at their investment decisions.

Stephen Quance has been the lead manager of BULIX since Aug 3, 2023. Most of the fund’s holdings were in companies like NextEra Energy, Inc (11.1%), Duke Energy Corp (7.1%) and The Southern Co (6.3%) as of Dec 31, 2023.

BULIX’s 3-year and 5-year annualized returns are 4.8% and 5.5%, respectively. Its net expense ratio is 0.66%. BULIX has a Zacks Mutual Fund Rank #1.

Franklin Utilities Fund (FKUTX - Free Report) invests the majority of its net assets in equity and equity-related securities of utility companies. These consist mainly of common stocks.

John Kohli has been the lead manager of FKUTX since Dec 30, 1998. Most of the fund’s holdings were in companies like NextEra Energy, Inc (9.7%), The Southern Co (5.5%) and Edison International. (5.5%) as of Dec 31, 2023.

FKUTX’s 3-year and 5-year annualized returns are 7.5% and 7.7%, respectively. Its net expense ratio is 0.72%. FKUTX has a Zacks Mutual Fund Rank #2.

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