Using Sector Funds to Construct Diversified Mutual Fund Portfolios
‘Sector funds are too risky.’ ‘I doubled my money with Fidelity Select Technology in 12 months!’ ‘Avoid sector funds.’ If all of this sounds confusing, you are not alone. Sector funds are among the more misused and misunderstood investments. So, how should you use sector funds?
Before looking at one of the uses of sector funds in detail, let’s review what sector funds really are: Sector funds confine their investments to a particular sector of the economy. Fidelity Select Healthcare (NDQ: FSPHX) is an example of a sector fund. By focusing on stocks of companies in the healthcare sector, the price moves of this fund are more dependent on factors that impact the healthcare sector rather than the economy as a whole. Demographic change, such as increasing age of the population, is an example of a factor that particularly drives investments in healthcare. By diversifying its assets across over 60 companies within the healthcare sector, Fidelity Select Healthcare provides investors with the opportunity to benefit from secular trends driving the demand for healthcare while mitigating company-specific risks such as failure of clinical trials conducted by a particular company.
Let’s now look at a high-potential approach of using sector funds.
Using sector funds to create a diversified mutual fund portfolio By allocating assets across a group of sector funds, investors can effectively create a diversified mutual fund portfolio using sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes such as the S&P 500