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4 Financial Funds to Buy on Imminent Fed Hike

Zacks Equity Research
Nordic American Tankers (NAT) delivered earnings and revenue surprises of -14.29% and -5.48%, respectively, for the quarter ended June 2018. Do the numbers hold clues to what lies ahead for the stock?

The central bankers began their two-day meet on Jun 12, and market watchers largely expect a hike in interest rate by 25 basis points once the meeting concludes. The U.S. economy has been steadily expanding even as the labor market remains near full employment. Further, nearly 223,000 new jobs were added last month, pushing the unemployment rate to a 50-year low.

Further, hourly wages shot up 0.3% in May, rising for the third straight month. Moreover, minutes from the Fed’s last meeting made it clear that the central bank is set to hike interest rates gradually this year. However, a June hike is in the offing.

Under conditions in which interest rates are likely to shoot up, investing in mutual funds from the financial sector seems prudent.

Financial Sector to Gain Big

Economists vehemently predict a possible rate hike by the Fed in its Jun 13 policy meeting. Notably, CME’s FedWatch Tool predicts a 95% probability of a hike in interest rates after the meeting.

Under conditions when rate hike looms large, the financial sector is poised to gain immensely. Higher interest rates will boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

Insurers also stand to benefit from higher such a scenario. As yields and coupons on corporate and government bonds rise, insurance companies can earn higher income by investing their premiums at higher yields.

FOMC Minutes Clearly Indicate a Rate Hike in June

In the recently concluded Fed meet on May 2, the Federal Open Market Committee jointly agreed to hold the interest rate steady. However, the committee acknowledged rising levels of inflation. The members noted that on a 12-month basis, overall inflation as well as inflation for items excluding food and energy, inched close to 2%.

The minutes from the meeting, indicated that though the rate hikes would be gradual this year, a hike in rate is inevitable in June. This is because most of the members stated that it would “soon be appropriate” to hike rates. Further, the minutes also stated that an upsurge in inflation would prove to be helpful.

4 Best Mutual Funds to Buy Now

Given such positives, we have highlighted four financial mutual funds poised to gain significantly from a rising rate environment in the United States. These funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have encouraging three and one-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their 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 also on the likely future success of the fund.

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).

Vanguard Financials Index Admiral VFAIX tracks the performance of MSCI US Investable Market Index (IMI)/Financials 25/50 using an indexing investment approach. The fund invests the majority of its assets in stocks that are part of this index. Such investments include large-cap, mid-cap and small-cap companies from the financial sector that are categorized under Global Industry Classification Standard (GICS).

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VFAIX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.10%, which is below the category average of 1.39%. The fund has three and five-year returns of 14.3% and 14.3%, respectively.

T. Rowe Price Financial Services PRISX seeks both capital growth and current income. The majority of its assets are invested in financial services companies. It may also purchase securities of companies involved in providing financial software. The fund uses fundamental bottom-up analysis to select securities.

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PRISX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.85%, which is below the category average of 1.39%. The fund has three and five-year returns of 11.3% and 13.7%, respectively.

Prudential Jennison Financial Services A PFSAX invests a heavy portion of its assets in equity securities of asset management companies, securities/brokerage firms, mortgage banking companies, banks, insurance companies, industrial finance companies and leasing companies.

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PFSAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.37%, which is below the category average of 1.39%. The fund has three and five-year returns of 3% and 4.5%, respectively.

Fidelity Advisor Financial Services A FAFDX invests the majority of assets in securities of companies engaged in providing financial services to consumers and industry. FAFDX invests in domestic and foreign issuers.

This Sector-Finance product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FAFDX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 1.12%, which is below the category average of 1.39%. The fund has three and five-year returns of 10.5% and 12.2%, respectively.

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