Sector Funds Definition & Risks

What are Sector Funds?

Sector funds are mutual funds which specialize in investing in a few sectors within the market.  This allows an investor to focus in on one or two sectors for investing.

Winning with Sector Funds

If an investor goes out and purchases a basket of the leading funds, this is a sure method for losing money, because today's winner is tomorrow's loser.  Sector funds require more effort than investing in a standard mutual fund or index fund.  An investor must first determine on their own which sector has the greatest odds for growth over the near-term.  So, instead of investing in one stock, the speculator now has exposure to the entire sector.  The end game of investing in sector funds is to outperform the broad market, by identifying these winning sectors, while still remaining somewhat diversified.

Risks of Investing in Sector Funds

Sector funds are perceived as a good move for diversification, because an investor is attempting to locate the strongest sector within the market.  This sort of top-down approach in theory should work as a hedge against weak markets and outperform strong markets.  However, the problem with sector funds is that they are often started right before the sector peaks.  This is because much like a hot product, once the demand falters, so does its value.  Take a look at Indian ETFs and how they have fallen.  India was one of the hottest markets over recent years and from this strength has brought about great interest in the market.  But just as soon as the Indian ETFs were created and marketed to the West, these funds began plummeting.

Popular Sector Funds

There are a number of popular sectors.  In the late 90s, the technology funds were huge and in the mid-2000s, REIT and oil sector funds where huge.  Below are a list of some of the top sector funds:

• Financial Services
• Technology
• Auto
• Oil
• Telecommunications
• Health Care
• Real Estate
• Gold