The inflation level in the United States in recent months has impacted markets more than any other factor. The U.S. Bureau of Economic Analysis reported that the Personal Consumption Expenditures index, the Federal Reserve’s favorite index to gauge inflation, rose 6.6% year over year in March against the central bank’s stated target of 2%. So, in a desperate bid to control inflation, which has been exploring four-decade-long unchartered territories, the Fed has taken a hawkish stance and resorted to hiking interest rates.
The Fed, like most central banks around the world, administers changes in the federal funds rate for depository institutions or banks in order to control inflation. The financial institutions, in turn, pass over the rate burden onto their consumers, who are looking to borrow money. So individual consumers are impacted by increases to their credit card and mortgage interest rates, especially if these loans carry a variable interest rate, and their purchasing power shrinks, thereby curbing inflation. Aside from the financial sector, business is impacted in general as profits go down.
In March, the Fed raised interest rates by 25 basis points for the first time in more than three years, and promised an aggressive path ahead with rate hikes coming in each of its six remaining meetings in 2022. In May, they increased the rates by 50 basis points, staying true to their word, as Fed Chairman Jerome Powell divulged plans of similar hikes in its next couple of meetings in June and July. Talks of 75 basis point hikes are on the table too, although many believe that come September, the Fed would re-assess its hawkish stance.
Bank stocks usually go up at the very signaling of rate hikes. As such, hikes positively impact net interest margins. After all, with persistent rate hikes, the spread between what banks earn by funding long-term assets, like loans, with shorter-term liabilities increases, thereby boosting a bank’s profit margins.
Therefore, it’s prudent for investors to place their bets on financial mutual funds having maximum exposure to banking stocks. Also, mutual funds, in general, diversify portfolios without the several commission charges that are mainly associated with stock purchases and trim transaction costs (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have, thus, selected three such mutual funds that have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and offer a minimum initial investment within $5,000.
Fidelity Select Financial Services Portfolio FIDSX invests the majority of its total assets in common stocks of companies principally engaged in providing financial services to consumers and industry. FIDSX, a non-diversified fund, factors in the issuer’s financial health, industry position and market conditions in its investment decisions.
Matt Reed has been the lead manager of FIDSX since May 31, 2019, and most of the fund’s exposure is to the financial sector, primarily in banks. The top three holdings for the fund are 6.57% in Wells Fargo, 4.04% in Bank of America and 3.62% in Morgan Stanley.
FIDSX’s 3-year and 5-year annualized returns are 11.2% and 10.7%, respectively. FIDSX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Fidelity Select Banking Portfolio FSRBX invests the majority of its total assets in common stocks of companies principally engaged in banking. FSRBX, a non-diversified fund, factors in the issuer’s financial health, industry position and market conditions in its investment decisions.
Matt Reed has been the lead manager of FSRBX since Sep 26, 2016, and most of the fund’s exposure is in the financial sector, primarily in banks. The top 3 holdings for the fund are 6.12% in Wells Fargo, 5.68% in U.S. Bancorp, and 5.57% in Total Money Market.
FSRBX’s 3-year and 5-year annualized returns are 6.1% and 6.3%, respectively. FSRBX has a Zacks Mutual Fund Rank #1.
Hennessy Small Cap Financial Fund Investor Class HSFNX invests the majority of its assets in securities of small-cap companies primarily engaged in financial services. HSFNX is non-diversified and does not invest more than 5% of its total assets in the equity-related securities of any one company that derives more than 15% of its revenues from brokerage or investment management activities.
David H. Ellison has been the lead manager of HSFNX since Jan 2, 1997, and most of the fund’s exposure is in banks. The top 3 holdings for the fund are 5.13% in Hingham Institution, 4.98% in First Midwest Bancorp, and 4.98% in Hancock Whitney.
HSFNX’s 3-year and 5-year annualized returns are 10.5% and 6.3%, respectively. HSFNX has a Zacks Mutual Fund Rank #2.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.