3 Utility Funds to Play Safe as Oil Prices Surge on Geopolitical Tensions

Inflation eased over the past two months, but renewed concerns about a potential surge are weighing on markets. Geopolitical tensions have intensified, with the United States and Iran failing to make progress toward an immediate peace agreement. Oil prices have started climbing again, while investors remain uncertain about the Federal Reserve’s future monetary policy.

In this uncertainty, investors may find it wise to focus on utility funds to help protect their portfolios. Notable options include Fidelity Select Utilities FSUTX, Franklin Utilities Fund FKUTX and American Century Utilities Inv BULIX.

Geopolitical Tensions Weigh on Markets

Oil prices climbed on Monday, with U.S. West Texas Intermediate crude futures rising 2.6% to settle at $84.50 per barrel. International benchmark Brent crude also advanced 2.7%, ending at $90.87 a barrel.

The surge came after the ceasefire between the United States and Iran expired Monday without any meaningful progress in negotiations. Tensions rose further after President Donald Trump threatened to bomb Oman if it “gets in the way” of reaching a deal with Iran.

Trump also said he would not extend the ceasefire, while Iran stated that it would not participate in discussions to extend the memorandum of understanding.

Oil prices had declined in June, following the agreement between the United States and Iran, which eased inflationary pressures over the past two months. The consumer price index increased 0.1% sequentially in July, while annual inflation fell to 3.4% from 3.5% in June.

Lower oil prices were among the key factors behind the moderation in inflation. However, crude prices remain considerably above their early-February levels, before the war began. Renewed concerns over a potential oil price spike could therefore put upward pressure on inflation again.

The Federal Reserve kept interest rates unchanged at its July FOMC meeting, although markets are currently pricing in a 25-basis-point rate hike this year. The central bank’s decision to delay further rate increases has added to uncertainty surrounding its future monetary policy.

3 Best Choices

We've identified three utility mutual funds that have demonstrated impressive annualized returns over 3-year and 5-year periods. These funds also hold a Zacks Mutual Fund Rank of #1 (Strong Buy), require an initial investment of no more than $5,000 and have a low expense ratio.

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).

Fidelity Select Utilities fund seeks capital appreciation. FSUTX normally invests at least 80% of its assets in common stocks of companies principally engaged in utilities and companies deriving the majority of their revenues from utility operations.

FSUTX’s 3-year and 5-year annualized returns are 14.9% and 10.9%, respectively. Fidelity Select Utilities fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.65%, which is lower than its category average.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

Franklin Utilities Fund seeks capital appreciation and current income. FKUTX invests at least 80% of its net assets in securities of public utilities. Franklin Utilities Fund invests more than 25% of its total assets in companies operating in the utilities industry. The manager expects more than 50% of the fund's assets to be invested in electric utilities securities.

FKUTX’s 3-year and 5-year annualized returns are 16.9% and 12.2%, respectively. Franklin Utilities Fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.71%, which is lower than its category average of 0.94%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

American Century Utilities Inv fund seeks current income and long-term capital growth. BULIX mainly invests 80% of its assets in stocks of companies engaged in the utilities industry. Within this 80% category, the managers will not buy shares of a company unless 50% or more of the company's revenues or net profits come from the ownership or operation of facilities used to provide electricity, natural gas, telecommunications services, cable television, water or sanitary services.

BULIX’s 3-year and 5-year annualized returns are 14.3% and 8.1%, respectively. American Century Utilities Invfund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.66%, which is lower than the category average of 1%.

To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.

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