In recent weeks, trade has been reeling under the apprehension of the Fed re-embarking on its path of accelerated interest rate hikes to bring down inflation, which is back, courtesy of rising energy prices. Saudi and Russia’s decision to not raise production till the end of this year has fueled this price rise. However, core inflation numbers, which do not include food and energy prices, have added some calming effect by remaining at steady and expected levels.
Treasury yields have remained high, with inflation resuming its climb. The fears of an economic slowdown have dampened investor mood, and markets have been in a sell-off mode, with their eyes set on the Fed’s moves. Currently, there is a consensus that rates would not go up in the September meeting, but what happens in the interim might dictate what the central bank would do in November.
The boom seen in 2023 till now has been primarily driven by the tech sector. However, with the possibility of an economic slowdown still in the cards and with interest rates not coming down from their current levels, investors are also likely to diversify and hedge risk in defensive sectors.
Defensive stocks remain in demand when markets are volatile because of their intrinsic nature. Even during the 2008 financial crisis, they had held the fort. Utility mutual funds are examples of such defensive instruments that protect investments when the goings are not good. The steady nature of the sector is ensured by the fact that demand for essential services is relatively unaffected by market volatility because of their non-discretionary nature. Whatever the state of the economy, a household or a business needs electricity, water, or gas, even if prices go up.
In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are usually higher than those paid by other equities.
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. We have also made sure that at least 75% of the fund is invested in the utility sector.
Fidelity Telecom and Utilities FIUIX seeks high total return through current income generation and capital appreciation. FIUIX primarily invests in common stocks, with at least 80% of assets in securities of utility companies. The fund invests in domestic and foreign issuers. The fund factors in the fundamental analysis of each issuer’s financial condition and industry position, as well as market and economic conditions.
Douglas Simmons has been the lead manager of FIUIX since Sep 29, 2005, and 76.5% of the fund is currently invested in the utility sector. Three top holdings for FIUIX are 13.2% in NextEra Energy, 9.3% in The Southern Company and 6.6% in PG&E.
FIUIX’s 3-year and 5-year annualized returns are 6.2% and 5.5%, respectively. The fund has a dividend yield of 1.9%, and its net expense ratio is 0.72% compared to the category average of 0.94%. FIUIX 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.
Franklin Utilities Fund FRUAX seeks capital appreciation and current income by investing the majority of its net assets in the public utility sector with a focus on electricity companies. FRUAX invests mostly in equity securities but may invest a small portion of its assets in debt securities.
John Kohli has been the lead manager of FRUAX since Dec 30, 1998, and 94.1% of the fund is currently invested in the utility sector. Three top holdings for FRUAX are 11.7% in NextEra Energy, 5% in The Southern Company and 4.8% in Edison International.
FRUAX’s 3-year and 5-year annualized returns are 6.2% and 6.9%, respectively. The fund has a dividend yield of 2.5%, and its net expense ratio is 0.55% compared to the category average of 0.94%. FRUAX has a Zacks Mutual Fund Rank #2.
Franklin Utilities A1 FKUTX invests the majority of its net assets in equity securities of the public utility sector. The objective of this fund is to seek capital appreciation and current income.
John Kohli has been the lead manager of FKUTX since Dec 30, 1998, and 94.1% of the fund is currently invested in the utility sector. Three top holdings for FKUTX are 11.7% in NextEra Energy, 5% in The Southern Company and 4.8% in Edison International.
FKUTX’s 3-year and 5-year annualized returns are 6.1% and 6.7%, respectively. The fund has a dividend yield of 2.4%, and its net expense ratio is 0.70% compared to the category average of 0.94%. FKUTX has a Zacks Mutual Fund Rank #2.
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