The retail sector put up a solid fight last year amid inflation pressures that saw consumers cutting down on purchases. However, this year didn’t start on an impressive note as retail sales declined sharply in January following a robust holiday season.

Although still slow, the sector is trying to make a rebound, with sales jumping once again in February. The Commerce Department reported last week that February retail sales totaled $700.7 billion, increasing 0.6% from January.

Year over year, retail sales jumped 1.5% as inflation saw a sharp decline over the past year.

Core retail sales, which exclude automobiles, gasoline, building materials and food services costs, remained unchanged from the previous month. In January, core retail sales were revised down from 0.4% to 0.3%.

Sales jumped across an array of segments in February. Sales at garden equipment and building material stores rose 2.2%. Receipts at motor vehicles and parts dealers increased an impressive 1.6%, while sales at gasoline stations climbed by 0.6%. Moreover, sales at electronics and appliances outlets grew 1.5%.

Rising price pressures saw people cutting down on discretionary items last year. However, demand started rebounding as inflation steadily declined over the past year, which saw people spending more in the final quarter of 2023.

Moreover, personal income remains solid despite the Federal Reserve adopting a strict monetary tightening policy to curb inflation. This is allowing people to spend freely, and is helping the retail sector.

The Federal Reserve has announced multiple rate cuts this year, with the first likely to happen in June. Lower interest rates mean lower borrowing costs, which bodes well for the retail sector and the broader economy.

3 Best Choices

We have selected three mutual funds with significant exposure to the retail and discretionary sectors. The funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and are poised to gain from the above 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 their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors in identifying 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 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 Leisure Portfolio FDLSX fund invests the majority of its assets in common stocks of companies principally engaged in the design, production, or distribution of goods or services in the leisure industries. FDLSX uses fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

Fidelity Select Leisure & Entertainment fund has a history of positive total returns for more than 10 years. Specifically, FDLSX has returned nearly 9.9% and 13.8% over the past three and five-year periods, respectively. FDLSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.73%.

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

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

Fidelity Select Retailing Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSRPX has returned nearly 4.3% and 14.2% over the past three and five-year periods, respectively. Fidelity Select Retailing Portfolio fund has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.72%.

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

Fidelity Select Consumer DiscretionaryPortfolio FSCPX fund invests the majority of its assets in common stocks of companies principally engaged in the manufacture or distribution of consumer discretionaries. FSCPX uses the fundamental analysis of factors such as each issuer's financial condition and industry position, as well as market and economic conditions, for its decisions.

Fidelity Select Consumer Discretionary Portfolio fund has a history of positive total returns for more than 10 years. Specifically, FSCPX has returned nearly 4.2% and 12.5% over the past three and five-year periods, respectively. Fidelity Select Consumer Discretionary Portfolio fund has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.75%, which is below the category average of 0.79%.

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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