The retail sector has been struggling due to inflationary pressures and high interest rates. However, the space is trying to bounce back. Retail sales grew at a meager pace of 0.1% in May after declining 0.2% in April, indicating that consumers are spending cautiously amid price pressures.

May’s growth was lower than the consensus estimate of a rise of 0.3%. However, year over year, retail sales grew 2.3%. The marginal rise in retail sales comes as inflation finally started showing signs of declining.

Inflation continued its downward movement in May. The consumer price index remained unchanged for the month after rising 0.3% in April, recording the softest reading since July 2022.

The negligible growth in retail sales in May was also, to a great extent, hurt by receipts at gas stations which declined 2.2%. This was, however, made up by a 2.8% jump in sales at books, music and sports goods stores.

The retail sector is making steady progress after suffering for most of 2023. High interest rates have been a major issue, but the sector is likely to perform well in the near term once the Federal Reserve starts its interest rate cuts.

Federal Reserve Chairman said in his June post-FOMC statement that the central bank sees only one rate cut this year, significantly lower than the three rate cuts expected earlier. However, even one rate cut in 2024 appears to be good news, as a large number of market participants were expecting no rate cut this year.

Additionally, the latest "dot plot" from the FOMC suggested a total 1% reduction in interest rates by 2025. Consequently, the Fed funds rate is projected to reach 4.1% by the end of 2025, which bodes well for the retail sector and the broader economy.

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 Consumer Staples Portfolio (FDFAX Quick QuoteFDFAX - Free Report) fund aims for capital growth. FDFAX invests the majority of its assets in securities of companies primarily engaged in manufacturing, marketing, or distribution of consumer staples products. Fidelity Select Consumer Staples Portfolio fund invests in both U.S. and non-U.S. issuers.

Fidelity Select Consumer Staples Portfolio has a history of positive total returns for more than 10 years. Specifically, FDFAX has returned 4.4% and 9.1% over the past three and five-year periods, respectively. FDFAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.72%.

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 (FSRPX Quick QuoteFSRPX - Free Report) 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 1.5% and 13.9% over the past three and five-year periods, respectively. Fidelity Select Retailing Portfolio fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.71%.

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

Fidelity Select Leisure Portfolio (FDLSX Quick QuoteFDLSX - Free Report) 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 7.2% and 12.8% over the past three and five-year periods, respectively. FDLSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.73%.

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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