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The U.S. non-manufacturing or service sector expanded at full speed in May as rapid vaccination efforts and decline in cases led to a relaxation of restrictions, following into an economic rebound. Per the Institute for Supply Management (ISM) report released on Jun 3, the index of non-manufacturing activities hit another all-time high last month rising to 64%, a 1.3 percentage point rise from April’s figure.

A reading above 50 indicates expansion in the sector and anything above 60% is expectational. In the survey, respondents stated that “stimulus money, increased vaccinations, increased dining capacity and pent-up demand are driving a fast recovery for dine-in restaurants.”

According to the group, all the 18 major services industries reported growth in May and the composite index witnessed 12 consecutive month growth, after contracting significantly last April and May. Americans engaged in activities that were restricted during the pandemic and that helped the sector outperform despite widespread labor and supply shortages hindering businesses from recovering and growing faster.

The sub-indexes like supplier deliveries index grew to 70.4% in May, surpassing 66.1% in the prior month, while the price index rose to 80.6% from 76.8% in April. The price gauge touched the highest level in 13 years as the price for labor and materials rose due to supply shortage.

However, the biggest bottleneck obstructing faster growth of the service sector is the labor shortage. Per the respondents’ comments, labor is in short supply even though the unemployment rate remains high. Some employers have reported that they are offering cash incentives to those showing up for an interview.

On the brighter side, businesses are hopeful that the rapid economic rebound will bring back things to normal and gradually curb shortages, boosting the space higher. In such a scenario, investing in mutual funds having significant exposure to services-related companies may prove prudent.

4 Top Mutual Fund Picks

We have, thus, selected four service-related mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such 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 peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to 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 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.

Fidelity Select Leisure Portfolio (FDLSX - Free Report) fund invests a bulk of its assets in securities of companies engaged in the design, production or distribution of goods or services in the leisure and recreation industries. The fund seeks growth of capital and invests both in U.S. and non-U.S. companies.

This Sector – Other product has a track of positive total returns for more than 10 years. Specifically, the fund has returned 16.5% and 17.4% over the past three and five years, respectively.

FDLSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.77%, which is below the category average of 0.79%.

Fidelity Select Financial Services Portfolio (FIDSX - Free Report) fund aims for capital appreciation. This non-diversified fund invests majority of assets in the common stock of companies engaged in providing financial services to consumers and the industry.

This Sector - Finance product has a history of positive total returns for over 10 years. Specifically, FIDSX has three and five-year return of 13.4% and 16.3%, respectively.

FIDSX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.77% versus the category average of 1.07%.

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

This Sector - Other product has a history of positive total returns for more than 10 years. Specifically, FSRPX has returned 26.3% and 23.7% over the past three and five years, respectively.

FSRPX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, which is below the category average of 0.79%.

Fidelity Select Health Care Services Portfolio (FSHCX - Free Report) fund invests a large chunk of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. FSHCX seeks appreciation of capital. The fund invests in securities of both U.S. and non-U.S. companies.

This Sector – Health product has a track of positive total returns for more than 10 years. Specifically, FSHCX has returned nearly 19% and 17.3% over the past three and five years, respectively.

FSHCX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.75%, which is below the category average of 1.03%