The U.S. retail sector put up an impressive show in 2023 amid high inflation and borrowing costs. This year has, so far, been good as sales have grown at a decent pace.

The Commerce Department reported last week that retail sales held steady in June, totaling $704.3 billion, following an upwardly revised 0.3% increase in May and ahead of analysts’ expectations of a decline of 0.3%.

Year over year, retail sales grew a solid 2.3% in June. Gasoline prices fell in June, resulting in a 3% decline in sales at stations. However, that money was channeled into spending on other goods.

Online sales rose 1.9% in June after growing 1% in the month earlier.  Sales at building materials and garden equipment stores grew by 1.4%, food services and drinking places saw a 0.3% rise in sales, and furniture stores saw a 0.6% increase in sales.

High inflation and higher borrowing costs have been major challenges for the retail sector. Yet, sales have been growing at a steady pace.

The Federal Reserve is also ready to begin its easing cycle. After a period of aggressive monetary tightening that saw interest rates increase by 525 basis points, rates are at an all-time high.

Recently, inflation has shown signs of decline, leading to strong expectations that the Fed will soon lower rates. Market predictions suggest a 25-basis point rate cut could happen at the Fed's September meeting.

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.