4 Mutual Funds to Pick as US Service Sector Hits Record High

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The U.S. economy is gradually recovering from the coronavirus pandemic-induced slump. Solid job additions are boosting the economy and supporting the manufacturing and service sectors. In fact, growth in the American service sector has been higher than expected in October. Per the Institute for Supply Management’s (ISM) report on Nov 3, its services PMI climbed to 66.7 in October from 61.9 in the month before. ISM’s service PMI has now grown for the 17th consecutive month.

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Business activities in the service sector grew by 7.5 percentage points to 69.8%, while new orders are up 6.2 percentage points to 69.7% in October. Though supply-chain disruptions and shortage of labor and materials are constraining capacity and impacting overall business conditions, improvement in the labor market upholds the momentum.

Record Employment a Headwind

On Nov 5, the U.S. Bureau of Labor Statistics reported that companies added 531,000 in October, surpassing the consensus estimate of 442,000.  The report also stated that September’s figure was upwardly revised to 312,000 and August’s job additions were up from 366,000 to 483,000. Stronger-than-expected job additions in October helped the unemployment rate drop down to 4.6%.

In total, the private sector added 604,000 new jobs last month, while there was a significant decline in jobs from the government. Additionally, average hourly earnings rose 0.4% in October and are now 4.9% higher over the last 12 months.

The report supports that the biggest labor shortage in years is still holding back the U.S. economy from recovery and adding to the largest surge in inflation in three decades. However, there have been solid job additions in leisure and hospitality, professional and business services, manufacturing, and transportation and warehousing spaces.

Rapid vaccination and reopening efforts are improving consumer confidence as they are gearing up for the holiday season. The heathy jobs market is also allowing them to indulge in spending despite the rising inflation. In such a scenario, investing in mutual funds with significant exposure to services-related companies may prove prudent.

4 Funds to Buy

We have, thus, selected four service-related mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and portfolio diversification without several commission charges 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).

Fidelity Select Leisure Portfolio FDLSX fund invests a bulk of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure and recreation industries. The fund seeks growth of capital and invests both in U.S. and non-U.S. companies.

This Sector – Other product has a track of positive total returns for more than 10 years. Specifically, the fund has returned 16.6% and 17.1% over the past three and five years, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FDLSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.77%, which is below the category average of 0.79%.

Fidelity Select Retailing Portfolio FSRPX fund aims for capital appreciation. This non-diversified fund invests a large portion of its assets in the common stock of companies engaged in merchandising finished goods and services, primarily to individual consumers.

This Sector – Other product has a history of positive total returns for more than 10 years. Specifically, FSRPX has returned 18.4% and 21.6% over the past three and five years, respectively. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSRPX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.73%, which is below the category average of 0.79%.

Fidelity Select Financial Services Portfolio FIDSX fund aims for capital appreciation. This non-diversified fund invests the majority of assets in the common stock of companies engaged in providing financial services to consumers and the industry.

This Sector – Finance product has a history of positive total returns for over 10 years. Specifically, FIDSX has three and five-year return of 14.4% and 15.8%, respectively. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FIDSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.77% versus the category average of 1.08%.

Fidelity Select Consumer Discretionary Portfolio FSCPX fund aims for capital appreciation. This non-diversified fund invests the majority of its assets in common stocks of companies that manufacture and distribute consumer discretionary goods and services. FSCPX invests in both domestic and foreign stocks.

This Zacks Sector-Other product has a history of positive total returns for more than 10 years. Specifically, the fund has three and five-year returns of 16.7% and 18%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSCPX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, below the category average of 0.79%.

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