Sector funds target specific industries and economic niches to seek above-average returns. With the opportunity for greater returns comes greater risk, as these funds typically are prone to fluctuate in value. They may invest solely in specific industries, such as utilities, technology, financial services, health care and manufacturing. They also may invest in commodities like oil or gold. Additionally, there are sector funds that invest in specific international markets, such as Germany and China.
Not all sector funds are alike, even those that invest in the same sector. Stock/cash allocations, sector segment weights, top holdings, portfolio size, past performance, yield, and portfolio turnover are among the criteria used to compare funds.
- Stock/cash allocations refer to the percentage of a fund’s assets that is actually invested in the chosen sector. In addition to cash, funds may invest in bonds, or even stocks from other sectors. Although these investments may increase performance or decrease risk, you should be aware of the portfolio’s composition.
- Many sectors can be divided into subsectors and industries, and sector weight refers to the percentage of assets invested in each.
- Portfolio turnover measures trading aggressiveness and often exceeds 100% in a single year.
- Although past performance is no guarantee of future results, the longer the return period the better. Look at returns over at least a five-year period, if available. Investors should ideally compare how funds performed in a variety of different market climates and be prepared for the volatility inherent in many sector funds.
- Yield is just one component of total return, but high yield can mean less reliance on capital gains.
As with any investment, be sure to get a copy of the fund’s annual report and prospectus before investing. You should also consult with your financial professional to help determine the suitability of sector funds in your overall portfolio.