Federal Reserve Chair Janet Yellen said that the Fed is mulling over an interest rate hike "relatively soon," courtesy of the healthy rise in job creation and inflation. Donald Trump's victory may also spur a rate hike due to his pledge to trim tax and push infrastructure outlays.
Trump's intention to roll back regulations as well as heightened uncertainty surrounding his win might stand in good stead for the broader financial sector. Given these positives, financial mutual fund investments are likely to prove profitable.
Rate Hike in the Cards
Yellen had signaled at possibilities of the U.S. central bank raising interest rates as employers continued to add jobs at a steady clip and inflation moved north. While the unemployment rate declined 0.1 percentage point last month to 4.9%, the U.S. consumer prices rose in October from a year earlier at the fastest rate in two years. The economy is also showing signs of strength, with housing starts surging to a nine-year high last month as builders ramped up construction of both single and multi-family homes.
Expectations for an interest-rate increase in December have grown in recent sessions. The federal funds futures contracts already imply a greater than 90% chance of a quarter-point hike in December. A hike in rates will unequivocally benefit banks and insurers. Firstly, profits for banks rise when rates move higher, since their spread will also increase. Secondly, most banking stocks are trading at a cheaper price compared to the overall market. For insurance companies, investment income forms a major revenue component. A low rate puts pressure on investment income and in turn on investment yields. Hence any increase in the interest rate would lead to gains for insurers.
Trump's Win Raises Hopes for Financial Sector
Regulatory burden that had plagued the financial industry for quite some time is likely to ease under Trump's administration and Republican controlled congress. One such change will be the raising of the minimum asset threshold for banking behemoths to $250 billion from $50 billion, which will lend more flexibility, boost valuations, strengthen consolidation and increase lending. Trump has called for repealing parts of the Dodd-Frank Act, which has for a considerable period of time limited operational flexibility.
Trump has, in the meantime, called for sweeping reductions in personal income tax along with slashing the business tax rate from 35% to 15%. Corporates will also get a chance to repatriate foreign profits at a rate of 10%. Trump is also in favor of beefing up public spending by hundreds of billions of dollars on infrastructure. He also said that he will support more spending on transportation and telecommunications infrastructure, clean water and electricity transmission in order to accelerate economic growth.
Trump's pledge to slash taxes and increase government spending will fuel inflation. Prices of bonds tanked as inflation mostly erodes the value of securities with a fixed-rate income stream. This in turn reached the 10-year treasury yield to its highest level since January. Higher longer-term interest rates can boost bank profits, as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.
4 Financial Mutual Funds to Buy Now
Higher interest rates and lighter regulations are expected to help financial companies reap huge profits. To top it, there is considerable uncertainty surrounding the impact of Trump's presidency on the U.S. economy over the medium and long term, which is expected to benefit financial trading firms by boosting their revenues.
We have chosen four mutual funds having exposure to the financial sector that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5000 and low expense ratios.
The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds.
John Hancock Regional Bank A (MUTF:FRBAX) invests the majority of its assets in stocks of regional banks and other lending companies, including commercial and industrial banks, savings and loans associations and bank holding companies. The fund's 3-year and 5-year annualized returns are 15.2% and 21.3%, respectively. Its annual expense ratio of 1.26% is lower than the category average of 1.48%. FRBAX has a Zacks Mutual Fund Rank #2.
Fidelity Select Insurance Portfolio (MUTF:FSPCX) invests a large portion of its assets and in no event less than 25%, in securities of companies principally engaged in underwriting, reinsuring, selling, distributing, and placing insurance. The fund's 3-year and 5-year annualized returns are 10.1% and 17.9%, respectively. Its annual expense ratio of 0.8% is below the category average of 1.48%. FSPCX has a Zacks Mutual Fund Rank #1.
Fidelity Select Brokerage & Investment Management (MUTF:FSLBX) invests a major portion of its assets in common stocks of companies principally engaged in stock brokerage, commodity brokerage, investment banking or related investment advisory services. The fund's 3-year and 5-year annualized returns are 1.5% and 13.6%, respectively. Its annual expense ratio of 0.78% is lower than the category average of 1.48%. FSLBX has a Zacks Mutual Fund Rank #2.
Fidelity Advisor Financial Services A (MUTF:FAFDX) invests the majority of its assets in securities of companies principally engaged in providing financial services to consumers. The fund's 3-year and 5-year annualized returns are 7.4% and 15.3%, respectively. Its annual expense ratio of 1.15% lags the category average of 1.48%. FAFDX has a Zacks Mutual Fund Rank #2.