3 Utility Funds to Play Safe Ahead of a Likely Fed Rate Cut – July 19, 2019

Trade-related issues have become a concern lately, as the United States and China sent mixed signals to each other. The already-imposed tariffs are in place even after trade talks resumed last month. This has left investors confused as they desperately await an easier monetary policy from the Fed.

In such a scenario, it would be prudent to invest in mutual funds that put their assets in safe-haven sectors such as utility.

Uncertainty Still Looms Over US-China Trade

There hasn’t been any substantial progress on tariff-related issues even after President Donald Trump and his Chinese counterpart met last month. In fact, the situation has gone downhill.

First, the number of companies moving their production units out of China has increased. More than 50 multinationals that include Apple, Dell and Nintendo are moving their units from China to escape tariffs, CNBC cited on Jul 18.

The trade dispute is already crushing the Chinese economy as the country registered its weakest quarterly economic growth in 27 years, at 6.2% in Q2. Trump’s tweet on Jul 15 claiming this was a result of U.S. tariffs caused much uproar. However, his claims were quickly dismissed by China.

Secondly, China brought in its commerce minister Zhong Shan into the trade negotiating team. Shan is considered a hardliner by a few officials in the United States, which could indicate that China wants to stand firm on its terms in the trade deal.

Given that U.S.-China trade relations are only worsening, a trade deal at this point is highly unlikely.

A Fed Rate Cut is Coming

In fact, Fed Chair Jerome Powell, in his congressional testimony earlier this month, indicated a possible rate cut at the FOMC meet scheduled for Jul 30-31. He cited trade uncertainties and weakness in global growth behind his dovish stance.

Also, New York Federal Reserve President John Williams’ speech this week appeared in sync with Powell. Williams said that cutting rates as the economy slows is an effective scheme for the Fed, especially when benchmark rates are already so low.

Further, the CME FedWatch, which closely watches FOMC rate moves, is majorly expecting a quarter-point rate cut at the end of this month (current benchmark rates are in the range of 2.25-2.5%).

Why Invest in Utility Mutual Funds Now?

Given the ongoing trade friction between United States and China, a rate cut doesn’t appear too far. Therefore, it could be ideal to invest in the kind of companies that could gain from a rate cut. Utility mutual funds fit the role perfectly. First, these are usually well-established companies that have huge infrastructure. Therefore, these companies benefit from a rate cut since getting a loan to expand and maintain the infrastructure becomes easier.

Now we come to the most important question: 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).

Our Choices

We have selected three utility mutual funds that you could consider adding to your portfolio. These funds either carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). Moreover, these funds have provided encouraging returns on a year-to-date basis. Additionally, the minimum initial investment is within $5000.

Fidelity Telecommunication and Utilities Fund (FIUIX Free Report) invests the majority of its assets in securities of telecommunications services companies and utility companies. The fund aims for high total return by focusing on combining current income and capital growth. The non-diversified fund may invest in both U.S. and non-U.S. issuers.

This Zacks sector – Utilities product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FIUIX carries a Zacks Mutual Fund Rank #1 and has returned 12.3% on a year-to-date basis. The fund has no minimum initial investment.

AllianzGI Global Water Fund Class A (AWTAX Free Report) aims for capital growth over the long term. The fund invests in securities of companies that are engaged in water-related activities. The non-diversified fund mostly invests in common stocks and other equity securities of organizations. 

This Zacks sector – Utilities product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

AWTAX carries a Zacks Mutual Fund Rank #2 and has returned 22.5% on a year-to-date basis. The fund has a minimum initial investment of $1000.

PGIM Jennison Utility Fund- Class A (PRUAX Free Report) aims for total return. The fund invests most of its assets in equity and equity-related and investment-grade debt securities of utility companies. The non-diversified fund mostly focuses on achieving its total return objective through combining capital growth and current income.

This Zacks sector – Utilities product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

PRUAX carries a Zacks Mutual Fund Rank #2 and has returned 15.9% on a year-to-date basis. The fund has a minimum initial investment of $2500.

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