The markets have already priced in that while the central bank would still be cutting rates in 2025, it would happen at a much slower pace than projected earlier. In September 2024, four cuts were anticipated for 2025. However, market participants are currently looking at a maximum of two such instances, which may go down further as the United States enters a phase of tariff impositions on trading partners and possible retaliations.
Interest rates, thus, will remain relatively high in the foreseeable future. When interest rates are high, banks and other financial institutions generally see higher profitability due to increased lending rates. The gap between such lending rates is considered a long-term asset for banks. Also, short-term liabilities such as deposits increase and boost net interest margins.
Stocks of banks, insurance companies and other financial institutions go up during high interest-rate periods. This is because financial services companies can earn more on the money they have and on the credit they issue to their customers. As if on cue, the S&P 500 Financials Select Sector SPDR (XLF), a benchmark for how the financial sector has been performing, has gained 8% so far in the two completed months in the calendar year.
In December 2024, the central bank projected that core inflation will hit 2.5% in 2025 before cooling to 2.2% in 2026 and 2% in 2027. With the Trump tariff policy in motion, earlier inflation projections might already be dated. This should prompt the Fed to hold interest rates high, which in turn will boost the financial sector.
For these reasons, financial mutual funds might provide much-required stability in a high-rate environment market. 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 financial 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 as well as carry a low expense ratio.
Davis Financial RPFGX uses the Davis Investment Discipline to invest most of the fund’s net assets in securities issued by companies principally engaged in the financial services sector. RPFGX invests primarily in common stocks.
Christopher Cullom Davis has been the lead manager of RPFGX since January 2014, and 92.4% of the fund is invested in the financial sector. Three top holdings for RPFGX are 10.3% in Capital One, 8.1% in Wells Fargo and 7.2% in JPMorgan Chase.