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3 Utility Funds to Invest in Amid Ongoing Market Volatility

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Volatility has returned to Wall Street despite inflation showing signs of cooling and the Federal Reserve gearing up for its rate cut cycle. Major indexes declined sharply on Aug 1 on fresh fears of recession as data showed that the manufacturing sector contracted further in July.

On Thursday, the Dow declined 1.2% to finish at 40,347.97. The S&P 500 fell 1.4% to close at 5,446.68, while the Nasdaq slid 2.3% to end at 17,194.15. Investors’ confidence took a hit after the ISM manufacturing index came up with a reading of 46.8%, signaling economic contraction.

Fears of a recession were ignited once again leading to a massive selloff. The data came just a day after the Federal Reserve Chairman Jerome Powell said at the end of the policy meeting that if data gives the central bank the confidence that inflation is declining sharply it could start its interest rate cut cycle.

Inflation has significantly decreased in recent months following a rise in the first quarter. The personal consumption expenditure (PCE) price index, which is the Federal Reserve's primary measure of inflation, increased by 0.1% in June, matching economists' forecasts.

On a yearly basis, PCE went up by 2.5% in June compared to a 2.6% rise in May. Core PCE inflation, which excludes the more volatile food and energy prices, also rose by 0.2% from the previous month and 2.6% year over year.

Additionally, the U.S. economy expanded at an annualized rate of 2.8% in the second quarter, doubling the growth rate from the first quarter and surpassing economists' predictions of a 2% increase.

However, the Federal Reserve has indicated only a single rate cut this year, lower than the three projected in March. Besides, growing fears of a recession could keep markets volatile for a longer period.

In this scenario, putting money into utility mutual funds seems like a smart decision. These funds provide important stability and the potential for growth, making them a sensible option for astute investors.

3 Best Choices

We've identified three utility mutual funds that have demonstrated impressive annualized returns over 3-year and 5-year periods. These funds also hold a Zacks Mutual Fund Rank of #1 (Strong Buy), require an initial investment of no more than $5,000 and have a low expense ratio.

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).

American Century Utilities Inv (BULIX - Free Report) fund seeks current income and long-term capital growth. BULIX mainly invests 80% of its assets in stocks of companies engaged in the utilities industry. Within this 80% category, the managers will not buy shares of a company unless 50% or more of the company's revenues or net profits come from the ownership or operation of facilities used to provide electricity, natural gas, telecommunications services, cable television, water or sanitary services.

BULIX’s 3-year and 5-year annualized returns are 3.2% and 3.3%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.66%, which is lower than its category average of 0.95%.

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

Franklin Utilities Fund (FKUTX - Free Report) seeks capital appreciation and current income. FKUTX invests at least 80% of its net assets in the securities of public utilities companies. Franklin Utilities Fund invests more than 25% of its total assets in companies operating in the utilities industry. The manager expects more than 50% of the fund's assets to be invested in electric utilities securities.

FKUTX’s 3-year and 5-year annualized returns are 6.7% and 6%, respectively. Franklin Utilities Fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.72%, which is lower than its category average of 0.95%.

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

Fidelity Select Utilities (FSUTX - Free Report) fund seeks capital appreciation. FSUTX normally invests at least 80% of assets in common stocks of companies principally engaged in utilities and companies deriving the majority of their revenues from utility operations.

FSUTX’s 3-year and 5-year annualized returns are 10% and 8.3%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, which is lower than its category average of 0.95%.

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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