There are several different ways one can diversify a portfolio, such as the different categories of the Morningstar 澳洲幸运5开奖号码历史查询:style box, which contain several different 澳洲幸运5开奖号码历史查询:asset classes. But another common way to diversify is between the various sectors of the economy. This is usually accomplished with 澳洲幸运5开奖号码历史查询:mutual funds that concentrate in one of the major sectors, such as natural resources or 澳洲幸运5开奖号码历史查询:utilities.

This article will examine the nature and composition of sector fund🌠s and the advantages and disadvantages that they p༒resent to investors.

What Is a Sector Mutual Fund?

As the name implies, a sector fund is a mutual fund that invests in a specific sector of the economy, such as energy or utilities. Sector funds come in many different flavors and can vary substantially in 澳洲幸运5开奖号码历史查询:market capitalization, 澳洲幸运5开奖号码历史查询:investment objective (i.e., growth and/or income), and 💜a class of securities within the portfolio. Sector funds do not fall into 𝔍a particular category in the Morningstar style box, such as large-cap value or mid-cap growth; instead, Morningstar ranks and analyzes sector funds in the following eight categories.

1. Natural Resources Funds: These funds invest in 澳洲幸运5开奖号码历史查询:oil and gas and other energy sources, as well as timber and forestry. These funds are usually appropriate for 澳洲幸运5开奖号码历史查询:long-term growth investors.

2. Utility Funds: These funds invest in securities of utility companies. They are usually designed to pay steady 澳洲幸运5开奖号码历史查询:dividends to conservative ꦐfixed-income investors💙, although they may have a growth element as well.

3. Real Estate Funds: These funds provide a way for smaller investors to participate in the gains from 澳洲幸运5开奖号码历史查询:real estate without having to actually buy 澳洲幸运5开奖号码历史查询:real property. They often provide both growth and income.

4. Financial Funds: These funds invest in the financial industry. Holdings will include securities of investment, 澳洲幸运5开奖号码历史查询:insurance, banking, mortgage, and 澳洲幸运5开奖号码历史查询:accounting firms.

5. Health Care Funds: These funds can cover any kind of for-profit medical institution, such as pharmaceutical companies. Many of these funds also focus on 澳洲幸运5开奖号码历史查询:biotechnology and the ꦫcompanies that make pioneering advances in this in🌸dustry.

6.澳洲幸运5开奖号码历史查询:Technology Funds: These funds seek to provide exposure in the 澳洲幸运5开奖号码历史查询:tech sector. This sector focuses primarily on computers, electro🌄nics, and other informational technology that is used in a wide range of applications.

7. Communications Funds: These funds focus on the telecommunications sector, but can include🧸 internet-related companies as we𓄧ll.

8. Precious Metals Funds: These funds provide exposure to a variety of metals, such as gold, silver, platinum, 澳洲幸运5开奖号码历史查询:palladium, and copper.

Some sector funds focus on a specific subsector of the economy, such as banking or 澳洲幸运5开奖号码历史查询:semiconductors. Morningstar classifies these funds into larger 澳洲幸运5开奖号码历史查询:peer groups for analytical purposes.

Historical Performance

Investors who are considering sector funds should be prepared to accept greater risk and volatility than what they will endure in the broad-based funds and 澳洲幸运5开奖号码历史查询:index funds. The various sectors of the U.S. economy have historically had higher highs and lower lows than the ﷽economy as a whole.

Subsectors, such as biotechnology, can be even more volatile. Sectors do perform differently at various points in the overall economic cycle. Some sectors do well in 澳洲幸运5开奖号码历史查询:bull markets but poorly in 澳洲幸运5开奖号码历史查询:bear markets, while others can grow earnings even during sluggish periods and recessions. Sector funds also tend to have higher turnover than other types of funds, so tax-conscious investors should pay close attention to 澳洲幸运5开奖号码历史查询:capital gains distribution rates.

Why Invest in Sector Funds?

Sector funds are designed to provide market participation for investors whose portfolios lack exposure in a given sector. They can also provide a greater measure of 澳洲幸运5开奖号码历史查询:diversification within a given sector than may be otherwise possible. The main reason that an investor would want to consider a sector fund is the same as for a particular𒅌 individual stock: The investor feels that the sector is about to experience a period of strong growth.

Instead of investing directly in the stock of a company that has just released a revolutionary new technology, the investor could consider 澳洲幸运5开奖号码历史查询:allocating assets to a technology fund that holds that company's stock in its portfolio. Sector funds can also serve to hedge a portfolio, as some sectors tend to move opposite the e♉conomy as a whole. For example, high energy prices can be a drain on the rest of the economy but a boon to the energy companies themselves. Inve⭕stors seeking to profit from this condition would benefit from investing a small portion of their portfolios in an energy fund.

Sensible Sector Fund Investing

Important thresholds for any investor considering focused sector bets is to own a diversified mainstream portfolio. In order to diversify efficiently, planners should carefully examine the possible overlap between any potential sector fund and the client's current portfolio, so that any sector fund that is chosen contains the fewest possible stocks that are already held outright or held in another fund.

Many of the security holdings within a sector fund are also often found in the mainstream funds of that fund family. For example, major oil stocks, such as ExxonMobil, are likely to be found not only in a given 澳洲幸运5开奖号码历史查询:fund company's 澳洲幸运5开奖号码历史查询:energy sector fund but its flagship 澳洲幸运5开奖号码历史查询:large-cap 澳洲幸运5开奖号码历史查询:value fund as well. Therefore, sector funds that invest in a specific subsector, such as altern♔ative energy sources, may provide greater diversification than a broader-b♎ased fund in some cases.

Averaging Into Sector Funds

Investors who add sector funds to their portfolios should also be aware that timing specific sectors of the market can be riskier and more difficult than trying to 🔯time the market as a whole. As mentioned previously, subsector funds are even more volatile by nature than broader-based funds, as their narrower focus will render them even more vulnerable to the economic cycles that can affect a specific industry, such as banking or mortgages.

Morningstar recommends that investors limit their exposure to any given sector to 5% of their portfolio. The use of such asset and sector allocation strategies as 澳洲幸运5开奖号码历史查询:dollar-cost averaging or periodic portfolio 澳洲幸运5开奖号码历史查询:rebalancing is also highly recommended. These methods can effectively reduce the volatility inherent in sector funds. However, sector funds tend to be appropriate for mor🌊e aggressive investors seeking higher returns over time.

Perhaps most importantly, sector fund investors should be prepared to stay invested for at least 5-10 years, so that they can experience the entire cyclical rise and fall of the sector. Investors with time frames shorter than five years face substantial 澳洲幸运5开奖号码历史查询:market risks.

Sector Fund Costs and Fees

Sector fund investors should closely monitor what they pay in terms of 澳洲幸运5开奖号码历史查询:sales charges and annual expenses for sector funds, which run higher than funds in more general categories. This is because sector funds (in any category) lack the 澳洲幸运5开奖号码历史查询:asset base that is fo🌳und in mainstream funds, such as a flagship growth or income funds. As a result, they do not enjoy the subsequent economic scale pricing that larger funds can offer.

Investors who are participating in market-timing strategies would be wise to explore the world of sector spiders and 澳洲幸运5开奖号码历史查询:exchange-traded funds (ETFs) that are available. These provide similar diversification to mutual funds, but trade like stocks and can be purchased much more cheaply than traditional 澳洲幸运5开奖号码历史查询:open-end funds. Many of these can also be shorted for those investors who use 澳洲幸运5开奖号码历史查询:short sales as part of an overall ♊hedging or investing strategy.

The Bottom Line

Sector funds are appropriate for aggressive investors seeking exposure within either an entire sector of the economy or a specific subsection thereof. Overexposure to any g𒊎iven sector of the market can subj🌼ect investors to undue risk and volatility, and appropriate measures should be taken to avoid this.