2 Consumer Discretionary Funds to Buy as Retail Sales Rise

After recording a stellar 2023, consumer discretionaries have been witnessing a steady 2024. From the beginning of the year till March, the Consumer Discretionary Select Sector SPDR (XLY) jumped 3.1%. While the sector is not scaling the heights of the last 12 months when the same SPDR advanced 24%, one should keep in mind that the year has started with the inflation metrics resuming their climb, and the Fed, to defend against that, has delayed cutting interest rates.

Inflation has the biggest and most far-reaching impact on consumer discretionary. When prices of consumer goods are in a state of continuous increase, people rein in spending on non-essential goods.

Yet, retail sales for February and March came in significantly above expectations, increasing 0.9% and 0.7%, respectively, after receding in January. This update on consumer spending comes as the consensus projections for economic growth in the first quarter have moved upward while the labor market has continued to add more jobs than expected earlier.

This suggests that an average household remains on relatively solid financial footing despite pressures from still-high inflation, stringent credit conditions and elevated interest rates. Recent revisions to government data indicate that consumers haven’t drawn down as much of their pandemic savings as believed earlier, and savings are still providing a buffer to support spending.

Even as excess liquidity has gone down, credit has become more expensive and purchasing power has diminished in these tough times. Despite these challenges, in March, the National Retail Foundation (“NRF”) forecast that in 2024, retail sales will increase 2.5-3.5% to between $5.23 trillion and $5.28 trillion. The estimate compares with 3.6% annual sales growth of $5.1 trillion in 2023. It is in line with the 10-year pre-pandemic average annual sales growth of 3.6%.

Also, it is widely believed that notwithstanding delays, we may still be looking at at least three rate cuts later this year. This can give consumers even more reason to raise their discretionary purchases. Hence, astute investors should consider mutual funds focused on consumer discretionaries to invest in.

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 two such 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, and carry a low expense ratio. Incidentally, both belong to Fidelity Investments.

Fidelity Select Retailing FSRPX normally invests the majority of its assets in common stocks of companies principally engaged in merchandising finished goods and services primarily to individual consumers. FSRPX 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.

As of November 2023, the top three holdings for FSRPX are 24.7% in Amazon, 7.1% in Walmart and 6.9% in Home Depot. Boris Shepov has been one of the lead managers for FSRPX since May 2018.

FSRPX’s 3-year and 5-year annualized returns are 3.5% and 13.8%, respectively. Its net expense ratio is 0.72%. FSRPX 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.

Fidelity Select Leisure FDLSX 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.

As of November 2023, the top three holdings for FDLSX were 17.4% in McDonald’s, 10.3% in Booking Holdings and 8.4% in Hilton Worldwide. Kevin Francfort has been one of the lead managers for FDLSX since September 2022.

FDLSX’s 3-year and 5-year annualized returns are 9.9% and 13.9%, respectively. Its net expense ratio is 0.73%. FDLSX has a Zacks Mutual Fund Rank #1.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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