3 Utility Funds to Buy Amid Delay in Fed's Planned Rate Cuts

Federal Reserve Chairman Jerome Powell said last that week it is unlikely there will be another interest rate hike. Investors have been worrying that the Federal Reserve could further hike interest rates as inflation remains sky-high.

Powell’s comments were cheered by investors, sending stocks on a rally. However, markets have been volatile after that as Powell’s comments didn’t give a clear picture of the Federal Reserve’s planned rate cuts.

The Federal Reserve earlier said that it plans three rate cuts by the end of this year. However, there has been no clear word from the Fed on the timing for the first rate cut.

Inflation is on the rise once again after declining sharply in 2023. The consumer price index (CPI) rose 3.5% in March, which is a lot higher than the Federal Reserve’s 2% target. The Federal Reserve also said that it sees no signs of inflation declining at a fast pace.

The central bank raised inflation by 525 basis points to take its benchmark policy rate in the range of 5.25-5.5% before leaving interest rates unchanged for the first time in June 2023. The Fed has since not hiked interest rates further and has indicated multiple rate cuts this year.

This saw markets rally at the beginning of the year. However, the optimism surrounding rate cuts has drastically faded since then as a surge in inflation has seen the Federal Reserve in no hurry to cut rates.

The uncertainty over the rate cuts could keep markets volatile for a longer period. Given this situation, investing in utility mutual funds seems to be an ideal choice as they present essential stability and growth potential, making them a prudent consideration for savvy 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 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 1.8% and 2.8%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.66%.

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 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 that more than 50% of the fund's assets will be invested in electric utilities securities.

FKUTX’s 3-year and 5-year annualized returns are 5.2% and 5.8%, respectively. Franklin Utilities 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 Utilities FSUTX fund seeks capital appreciation. FSUTX normally invests at least 80% of its 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 8.2% and 7.9%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.74%.

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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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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