The U.S. economy posted its weakest quarterly growth in two years between January and March, as spending levels declined considerably. U.S. inflation, on the other hand, barely increased on lukewarm spending, which made it even less likely that the Fed will raise rates soon.
Given these weak economic conditions and a rate hike not in the cards, investing in utility mutual funds should be a prudent decision. Moreover, investing in utilities may be a smart option to avoid the sell-in-May syndrome.
Economy Weak, Lackluster Spending
Tepid business and consumer spending adversely affected the U.S. economy in the first quarter. Nonresidential fixed investment plunged 5.9% at an annualized rate in the said quarter. Weak global financial conditions and slump in oil prices were cited to be the reasons behind this decline in business spending. Orders for nondefense capital goods excluding aircraft also remained unchanged in March. The flat reading indicated that this significant gauge of business spending has almost no momentum heading into the second quarter.
As for consumer spending, household purchases increased at an annual pace of 1.9% in the first quarter, the least since early 2015. Additionally, retail sales, a key barometer of consumer spending, dropped 0.3% in March from last year as people curtailed their spending on car purchases. Consumer spending accounts for about two-thirds of American economic activity. Hence, soft spending levels are a telltale sign that the economy is weak.
Fed Cautious on Rate Hikes
A separate measure on consumer spending, the core personal consumption expenditures (PCE) price index excluding the volatile food and energy components barely rose in March. It increased 0.1%, below the consensus estimate of a 0.2% gain. Consumer expenditure levels slowed down despite the jump in income levels.
Since the so-called core PCE came in way below the Fed's desired target level of 2%, it is less likely that the Fed will hike rates twice this year. The core PCE is the Fed's preferred inflation measure. The Federal Open Market Committee had kept interest rate flat within the 0.25 and 0.5 percent range in April. The Fed also said that it was in no hurry to hike rates further. It had hiked rates in December for the first time in nearly a decade.
4 Utility Mutual Funds to Invest In
Given the gloominess in the economy on weak spending levels and Fed's dovish stance on rate hike, it will be prudent to invest in mutual funds exposed to the utility sector. Demand for items such as electricity, gas and water tends to be immune to the vagaries of the economy. Utility companies also boast predictable cash flows and generally give dividends to their investors. Since utility companies are mostly regular dividend payers they are often regarded as "bond substitutes." Steady dividend payments make the stocks less volatile.
Utility companies at the same time benefit from a low interest rate scenario. This is because higher rates raise their financing costs, which eventually reduce their appeal as dividend investments.
Meanwhile, the broader markets are on the verge of entering a period from May to October where stocks suffer their most severe losses for the year. This period has given rise to the old adage "Sell in May and go away." The strategy states that any investor who sells stocks in May and then gets back in November, thereby avoiding the volatile May to October period, make more moolah than those who remained invested throughout the year. Hence, in this period, investing in utility companies will turn out to be a lucrative option. Such companies are unfazed by turbulent times as they have very low correlation to the markets.
We have selected four such utility mutual funds that have given impressive year-to-date and 3-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy) and carry a low expense ratio. Funds have been selected over stocks, since funds reduce transaction costs for investors and also diversify their portfolio without the numerous commission charges that stocks need to bear.
Fidelity Telecom and Utilities ( FIUIX ) invests the majority of its assets in securities of telecommunications services and utility companies.
FIUIX's year-to-date and 3-year annualized returns are 12% and 7.9%, respectively. Annual expense ratio of 0.74% is lower than the category average of 1.25%. FIUIX has a Zacks Mutual Fund Rank #2. FIUIX offers a minimum initial investment of $2,500.
American Century Utilities Investor ( BULIX ) invests a major portion of its assets in equity securities of companies engaged in the utilities industry.
BULIX's year-to-date and 3-year annualized returns are 14.2% and 8.9%, respectively. Annual expense ratio of 0.67% is lower than the category average of 1.25%. BULIX has a Zacks Mutual Fund Rank #1. BULIX offers a minimum initial investment of $2,500.
Fidelity Advisor Utilities A ( FUGAX ) invests a large portion of its assets in securities of utility companies and those deriving the majority of revenues from their utility operations.
FUGAX's year-to-date and 3-year annualized returns are 11% and 6.7%, respectively. Annual expense ratio of 1.11% is lower than the category average of 1.25%. FUGAX has a Zacks Mutual Fund Rank #2. FUGAX offers a minimum initial investment of $2,500.
ProFunds Utilities UltraSector Investor ( UTPIX ) seeks daily investment results that correspond to one and one-half times the daily performance of the Dow Jones U.S. UtilitiesSM Index.
UTPIX's year-to-date and 3-year annualized returns are 18.4% and 12.1%, respectively. Annual expense ratio of 1.76% is lower than the category average of 1.99%. UTPIX has a Zacks Mutual Fund Rank #1. UTPIX offers a minimum initial investment of $15,000. By setting a high minimum investment, fund managers can effectively weed out short-term investors and regulate cash inflows to the fund, which can be helpful for day-to-day management of assets.
About Zacks Mutual Fund 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.