The utilities sector generally serves as a fallback option for investors during economic downturns, primarily because it is defensive in nature. Even during the 2008 global economic crisis, it held the fort. After the subprime crisis, the Fed cut interest rates to stimulate the economy, and investors flocked to utilities. Whatever the state of the economy, a household or a business needs its electricity, water, or gas supplies.
The market witnessed the first string of interest rate cuts by the Fed since September 2024 to mark the first loosening of grip on monetary policy since tightening began in early 2022. While the central bank has warned that because of the state of the economy, inflation and the labor market, the pace of rate cuts will be slow going forward, it has already come significantly down from the levels it had gone up to. It is currently at the 4.25-4.50% level. While market participants expect fewer instances of rate reductions in the second part of 2025, they are certainly not expecting any rate increases. This entails that interest rates are going to be relatively low going forward.
So, after growing 23.3% in 2024, the utilities sector is already off to a good start in 2025, having advanced 5% year to date as of Feb. 25. Growth has been driven primarily by the optimism around artificial intelligence (AI) and the energy needed to power it. While nuclear energy and other alternate forms of energy have investors’ attention, a key driver of the sector has also been the upward momentum in electric demand in the United States.
In addition, utilities are usually considered long-term buy-and-hold options as they regularly declare dividends, and dividend yields on utility stocks are generally higher than those paid by other equities. In this environment, utility stocks provide much-required stability and growth potential. Hence, astute investors should consider such stocks at present.
In this environment, utility mutual funds provide much-required stability and growth potential. Hence, astute investors should consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
We have thus selected three utility mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns and minimum initial investments within $5000, and carry a low expense ratio.
Fidelity Advisor Utilities I FUGIX primarily invests in common stocks of companies principally engaged in the utilities industry and companies deriving a majority of their revenues from their utility operations.
Pranay Kirpalani has been the lead manager of FUGIX since December 2024. Three top holdings for FUGIX are 10.1% in NextEra Energy, 8.2% in Duke Energy and 6.6% in Sempra.
FUGIX’s 3-year and 5-year annualized returns are 11.9% and 8.6%, respectively. Its net expense ratio is 0.73%. FUGIX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.
Fidelity Select Utilities FSUTX seeks capital appreciation and current income by investing the majority of its net assets in utilities and companies earning revenues from utility operations. FSUTX advisors use fundamental analysis of each issuer's financial condition and industry position, as well as market and economic conditions, to arrive at their investment decisions.
Pranay Kirpalani has been the lead manager of FSUTX since December 2024. Three top holdings for FSUTX are 10.2% in NextEra Energy, 7.4% in Duke Energy and 6.8% in Sempra.
FSUTX’s 3-year and 5-year annualized returns are 12.1% and 8.9%, respectively. Its net expense ratio is 0.67%, compared to the category average of 0.96%. FSUTX has a Zacks Mutual Fund Rank #1.
Franklin Utilities A1 FKUTX invests the majority of its net assets in securities of public utilities companies, which provide electricity, natural gas, water and communications services.
John Kohli has been the lead manager of FKUTX since December 1998. Three top holdings for FKUTX are 10.8% in NextEra, 5.5% in The Southern Company and 5.1% in Edison International.
FKUTX’s 3-year and 5-year annualized returns are 8.4% and 6.3%, respectively. Its net expense ratio is 0.71% compared to the category average of 0.95%. FKUTX has a Zacks Mutual Fund Rank #2.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
