The utilities sector oftentimes acts as a fallback option for investors during economic downturns because of its defensive nature. Likewise, it falls out of favor during times of economic growth, with growth stocks driving the markets.
The defensive nature of utility sector stocks makes them resilient, if not invulnerable against market volatility. Even during the 2008 global economic crisis, they had held their own. Utility stocks are examples of such defensive instruments that protect investments when the goings are not good. Whatever the state of the economy, a household or a business needs its electricity, water, or gas supplies.
The market has already witnessed the first announcement of interest rate cuts by the Fed in September to mark the first loosening of grip on monetary policy since tightening started in early 2022. While the central bank wants to analyze further economic data on jobs, inflation and various sectors before embarking on rapid rate cuts, it is widely expected that another 25 bps cut will be announced from its November meeting.
After the 2008 sub-prime crisis, the Fed cut interest rates to stimulate the economy. On cue, investors flocked to utilities, which are viable defensive choices during macroeconomic downturns. The sector has done very well this year already, with the S&P 500 Select Sector SPDR (XLU) advancing 29.1% year to date as of Oct. 31, 2024. It has continued to be the S&P 500’s best performing sector over the past year.
In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are generally higher than those paid by other equities. In this environment, utility stocks provide much-required stability and growth potential. Hence, astute investors should consider such stocks at present.
In this environment, utility mutual funds provide much-required stability and growth potential. Hence, astute investors should consider such funds at present. 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 three utility 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.
American Century Utilities Investor Shares BULIX primarily invests in equity securities of utility companies. BULIX advisors use quantitative and qualitative management techniques, as well as risk controls, to arrive at their investment decisions. This involves ranking stocks based on their growth and valuation characteristics.
Stephen Quance has been the lead manager of BULIX since August 2023. Three top holdings for BULIX are 10.8% in NextEra Energy, 5.5% in Constellation Energy and 5.4% in The Southern Company.
BULIX’s 3-year and 5-year annualized returns are 9.2% and 5.7%, respectively. Its net expense ratio is 0.66%. BULIX 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 Utilities FSUTX seeks capital appreciation and current income by investing the majority of its net assets in utilities and companies earning revenue from utility operations. FSUTX advisors use fundamental analysis of each issuer's financial condition and industry position, as well as market and economic conditions, to arrive at their investment decisions.
Douglas Simmons has been the lead manager of FSUTX since October 2006. Three top holdings for FSUTX are 15.6% in NextEra Energy, 7.1% in Sempra and 6.9% in Constellation Energy.
FSUTX’s 3-year and 5-year annualized returns are 16.3% and 10.4%, respectively. Its net expense ratio is 0.73%, compared to the category average of 0.95%. FSUTX has a Zacks Mutual Fund Rank #1.
Franklin Utilities A1 FKUTX invests the majority of its net assets in securities of public utilities companies. These are companies that provide electricity, natural gas, water and communications services.
John Kohli has been the lead manager of FKUTX since December 1998. Three top holdings for FKUTX are 10.5% in NextEra, 5.9% in The Southern Company and 4.9% in Edison International.
FKUTX’s 3-year and 5-year annualized returns are 12.3% and 7.8%, respectively. Its net expense ratio is 0.72%. FKUTX has a Zacks Mutual Fund Rank #2.
Want key mutual fund info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>
Zacks' Research Chief Names "Stock Most Likely to Double"
Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.
This top pick is among the most innovative financial firms. With a fast-growing customer base (already 50+ million) and a diverse set of cutting edge solutions, this stock is poised for big gains. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners UpGet Your Free (BULIX): Fund Analysis Report
Get Your Free (FSUTX): Fund Analysis Report
Get Your Free (FKUTX): Fund Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
