3 Financial Mutual Funds To Buy On Rising Interest Rates

At the conclusion of the FOMC meeting on Mar 21, the Jerome Powell led Federal Reserve hiked interest rates by a quarter-percentage point and projected a steeper path of rate hikes in 2019 and 2020, citing a healthy economic outlook. The vote to lift the benchmark lending rate was a unanimous 8-0.

Fed officials further projected a total of three rate hikes this year. After all, inflation is tilting toward the central bank’s 2% annual target. The central bank’s preferred price gauge rose 1.7% in the 12 months through January and the latest estimates indicate that policymakers project the rate to hit the 2% mark next year and around 2.1% in the year after that.

Financials Are Big Winners in a Rising Rate Environment

Banks are definitely the go-to rate trade. As a general rule, higher interest rates will boost bank profits as these increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities.

The relationship between interest rates and insurance companies is linear and straightforward, meaning the higher the rate, the greater the growth. Insurers derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a rise in Fed fund rates and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more investment income, expanding their profit margins.

Brokerage firms and asset managers benefit largely from a rising rate environment since an increase in rates generally concurs with periods of economic strength and upbeat investor sentiments.

Play the Rate Hike With These 3 Financial Mutual Funds

We have, thus, highlighted three financial mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to help investors identify 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 probable success of the fund.

The question here is: 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).

T. Rowe Price Financial Services PRISX, a Zacks Rank #1 (Strong Buy) fund, invests in common stocks of companies in the financial services industry.

This T. Rowe Price Financial Services fund, as of the last filing, allocates funds in two major groups — Large Value and Small Value. Further, as of the last filing, JP Morgan Chase (NYSE:JPM) & Co, Wells Fargo (NYSE:WFC) & Co and Citigroup Inc (NYSE:C) were the top holdings of PRISX.

Managed by T. Rowe Price, this T. Rowe Price Financial Services fund carries an expense ratio of 0.85%, compared with the category average of 1.46%. Moreover, PRISX requires a minimal initial investment of $2,500.

The T. Rowe Price Financial Services fund has given annualized returns of 17% and 14.7% in the last one-year and five-year period, respectively.

Fidelity Advisor Financial Services A FAFDX, a Zacks Rank #2 (Buy) invests the majority of assets in securities of companies engaged in providing financial services to consumers and industry. FAFDX invests in domestic and foreign issuers.

Fidelity Advisor Financial Services A, as of the last filing, allocates funds in two major groups — Large Value and Small Value. Further, as of the last filing, Citigroup Inc, Capital One Financial Corp (NYSE:COF) and Bank of America Corp (NYSE:BAC) were the top holdings of FAFDX.

Fidelity Advisor Financial Services A, managed by Fidelity, carries an expense ratio of 1.12%, compared with the category average of 1.46%. Moreover, FAFDX requires a minimal initial investment of $2,500.

The Fidelity Advisor Financial Services A fund has given an annualized return of 17.9% and 14.2% in the last one-year and five-year period, respectively.

Fidelity Select Insurance Portfolio FSPCX, a Zacks Rank #2 (Buy) invests a major portion of its assets in securities of companies principally engaged in underwriting, reinsuring, selling, distributing, or placing of property and casualty, life, or health insurance.

This Fidelity Select Insurance Portfolio fund, as of the last filing, allocates funds in Large Value. Further, as of the last filing, Chubb Corp (NYSE:CB), American International GR and Travelers Cos Inc were the top holdings of FSPCX.

The Fidelity Select Insurance Portfolio fund, managed by Fidelity, carries an expense ratio of 0.79%, compared with the category average of 1.46%. Moreover, FSPCX requires a minimal initial investment of $2,500.

The Fidelity Select Insurance Portfolio fund has given an annualized return of 9.6% and 14.9% in the last one-year and five-year period, respectively.

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