These are trying times for the markets, with most of the benchmarks striving to finish their trading days in the green and the mutual funds are not being spared either. While most of the sectors have been failing to attract investors' attentions since the start of this year, the safe-haven appeal of the utility sector has bucked the trend to some extent. So buying utility mutual funds with strong fundamentals could help investors avoid this negative tone in a less risky manner.
According to Lipper, net outflows for all equity funds came in at around $12 billion for the week ending Jan 6, indicating the market downturn. As a result, the demand for safe haven securities - such as those from the utility sector - is growing among investors. The broader S&P 500 utility sector - the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) - has attracted nearly $294.6 million of net inflow so far this year.
Though the sector is only up 0.3% in the year-to-date frame, it is the only sector among major S&P 500 domains that finished in the positive territory during this period. Meanwhile, the sector gained nearly 2.6% in the past one-month period when the other major sectors registered a minimum loss of 4%.
Before suggesting the appropriate utility mutual funds for your portfolio, let's find out what is propelling the demand of securities from the utility sector.
Concerns over China-led global growth issues and a persistent slump in oil prices dampened investor sentiment from the start of 2016, and have dragged down the major benchmarks into negative territory. Rising expectations about the lift-off of Iranian sanctions, which happened yesterday, dragged down the energy sector, which in turn weighed on the benchmarks on Friday.
While WTI crude plunged by 6.1% to a 12-year low level of $29.42 per barrel, Brent crude declined nearly 0.1% to $31.01 a barrel. The VOLATILITY S&P 500 (VIX) - an important indicator of volatility level - jumped 12.2% on Friday and surged 6.3% in the year-to-date frame.
In this volatile environment, the utility sector provides safety to investors due to its higher immunity against market peaks and troughs. Though the utility sector, which requires a high level of debt, was initially affected by the rate hike, its safe haven appeal gradually offset the impact. Also, after declining significantly in 2015, utility stocks are now offering attractive entry points.
Meanwhile, the sector is also popular among investors for generally offering stable and healthy yields. Additionally, demand for essential services such as those provided by utilities is believed to remain unchanged even during difficult times. This is also an important factor behind the stability of the sector even during a market downturn.
3 Mutual Funds to Buy
Given the safety and yields that are latent in the sector under discussion, below we present 3 utility mutual funds that carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #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 the 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.
These funds have encouraging 4-week, and 3- and 5-year annualized returns. The minimum initial investment is within $5000. These funds also have a low expense ratio.
American Century Utilities Fund Investor (MUTF:BULIX) invests a large portion of its assets in equities related to the utility industry. BULIX's portfolio is constructed on qualitative and quantitative management techniques. In the quantitative process, stocks are ranked on their growth and valuation features.
BULIX currently carries a Zacks Mutual Fund Rank #1. It boasts a 4-week return of 3.2%. The 3- and 5-year annualized returns are 9.2% and 8.6%, respectively. The annual expense ratio of 0.67% is significantly lower than the category average of 1.25%. BULIX has a yield of 2.87%.
Franklin Utilities Fund A (MUTF:FKUTX) seeks capital appreciation and current income. FKUTX invests a large chunk of its assets in common stocks of public utilities that are involved in providing electricity, natural gas, water, and communications services.
FKUTX currently carries a Zacks Mutual Fund Rank #2. It has a 4-week return of 4.1%. The 3- and 5-year annualized returns are 9.2% and 10.5%, respectively. The annual expense ratio of 0.73% is also lower than the category average. FKUTX provides a yield of 2.77%.
Fidelity Telecom and Utilities (MUTF:FIUIX) focuses on acquiring common stocks, investing heavily in telecom and utility companies. FIUIX may purchase both foreign and domestic securities. FIUIX utilizes fundamental analysis to select its holdings, studying both firm-specific and broader market and economic factors.
FIUIX currently carries a Zacks Mutual Fund Rank #2. It boasts a 4-week return of 3.3%. The 3- and 5-year annualized returns are a respective 7.7% and 9.2%. The annual expense ratio of 0.79% is lower than the category average. FIUIX provides a yield of 2.06%.