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4 Retail Fund Choices as Consumer Spending Boosts GDP - Mutual Fund Commentary

Consumer spending again played a key role in boosting the economy in the second quarter. According to the "advance estimate" released by the U.S. Department of Commerce last week, the second quarter GDP rose 2.3%, compared to the revised 0.6% growth rate witnessed in the first quarter. The catalyst's effect is likely to sustain for the next few quarters.

The positive momentum of the consumer sector was also reflected in statements made after the latest Federal Open Market Committee's (FOMC) two-day policy meeting. The policy makers said that "economic activity has been expanding moderately in recent months" and that there has been "moderate" improvement in consumer spending levels along with an "additional improvement" in the housing market.

Given this bright outlook, investing in retail-focused mutual funds with strong fundamentals may prove to be profitable as a major part of consumer expenditures goes to this sector.

Factors Driving the Recovery

Real personal consumption expenditure rose 2.9% during the quarter, higher than the first quarter's growth rate of 1.8%. A solid gain in consumer spending, which contributes more than 75% in the economic activity, emerged as the main driver behind the economic recovery.

Moreover, real exports during the quarter increased 5.3%, in contrast to the 6% fall in the first quarter. Imports of goods and services rose at a pace of 3.5%, lower than 7.1% increase in the previous quarter. The trade gap contributed nearly 0.13% to the GDP number during the quarter, comparing favorably with first quarter wherein a decline in exports had a negative 1.92% impact on the GDP rate.

Additionally, the personal consumption expenditure (PCE) price index increased at the highest pace in more than three years during the quarter. The index gained 2.2% during the quarter, compared to first quarter's 1.9% decline. The index, when measured excluding food and energy prices, rose 1.8% in the quarter.

Meanwhile, it is speculated that changes in the methodology in measuring the GDP number, which has been implemented from this quarter, helped in the upward revision of first quarter GDP. Previously, it was estimated that the economy contracted at a rate of 0.2% in the first quarter, which was revised upward to 0.6% rise.

Retail/Wholesale Sector Sees Positive Earnings Trend

The Consumer Staples, Consumer Discretionary and Retail/Wholesale are the main sectors that attract major part of consumer expenditure. As of Aug 5, Retail/Wholesale sector reported stronger results compared to the other two sectors.

Retail/wholesale companies from the S&P 500 that have so far reported results showed a 12.6% year-on-year jump in revenues and 7.7% increase in earnings. This outpaced the S&P 500's earnings loss of 2.4% on 4.1% lower revenues (with results from 416 S&P 500 companies).

The Consumer Discretionary sector posted 4.1% earnings growth and year-over-year revenue growth of 5.6%. Meanwhile, companies from Consumer Staples sector witnessed a year-over-year decline of 0.7% in earnings and a 7.8% decrease in revenues.

Going forward, the Retail/Wholesale sector is anticipated to witness a year-over-year earnings growth of 4.8% in the third quarter on 5.9% higher revenues. The S&P 500 companies are expected to post a year-over-year decline of 4.9% in earnings and a 4.3% drop in revenues during the quarter.

4 Retail Mutual Fund Picks

After being one of the few bright spots in the first quarter GDP report, consumer spending continued to boost the economy in the second. Meanwhile, consumer expenditure is likely to continue this positive trend on the back of strong economic fundamentals including strong labor-market conditions, increase in wages and a slump in oil prices .

Bright earnings prospect for the Retail/Wholesale sector further increases the possibility of the impressive trend continuing in near future. Thus mutual funds from this sector, which are having impressive growth potential and strong fundaments, are likely to benefit from this favorable scenario.

Below we present 4 mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy) . We expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

They also have encouraging year-to-date and 3 and 5-year annualized returns. The minimum initial investment is within $5000.

Fidelity Select Retailing Portfolio (FSRPX) invests a minimum of 80% of its assets in securities of firms involved in merchandising finished goods and services to consumers.

FSRPX currently carries a Zacks Mutual Fund Rank #2. FSRPX boasts year-to-date return of 15.3% and has returned over 35.3% over the past 1 year. The 3 and 5 year annualized gains stand at 25.2% and 24.2%. The annual expense ratio of 0.81% is lower than category average of 1.46%.

Putnam Global Consumer A (PGCOX) invests in mid to large companies that are involved in the manufacture, sale or distribution of consumer staples and consumer discretionary products and services.

PGCOX currently carries a Zacks Mutual Fund Rank #1. PGCOX boasts year-to-date return of 10.8% and has returned nearly 15.3% over the past 1 year. The 3 and 5 year annualized returns are 16.9% and 15.1%. The expense ratio of 1.29% is however higher compared to category average of 1.27%.

Rydex Retailing Investor (RYRIX) seeks growth of capital. RYRIX invests almost all its assets in equities of US-traded retail companies. Apart from investing in small to mid-cap retailing companies, RYRIX may also buy ADRs to get exposure to foreign retailers. RYRIX may also invest in derivatives and US government securities.

RYRIX currently carries a Zacks Mutual Fund Rank #2. RYRIX boasts year-to-date return of 8.5% and has returned over 22.7% over the past 1 year. The 3 and 5 year annualized gains stand at 18.4% and 19.6%. The annual expense ratio of 1.33% is lower than category average of 1.46%.

Fidelity Select Consumer Discretionary Portfolio (FSCPX) normally invests at least 80% of its assets in companies mostly involved in the manufacture and distribution of consumer discretionary products and services.

FSCPX currently carries a Zacks Mutual Fund Rank #1. FSCPX boasts year-to-date return of 8.4% and has returned over 21.8% over the past 1 year. The 3 and 5 year annualized gains stand at 21% and 19.2%. The annual expense ratio of 0.79% is lower than category average of 1.46%.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the Zacks Rank.

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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.


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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