As the name suggests, 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 differ largely in market capitalization, investment objective, and class securities within the portfolio.
Natural Resources Funds
These funds invest in oil and gas and other energy sources, as well as timber and forestry. These funds are usually appropriate for long term growth investors.
Utility Funds
These funds invest in securities of utility companies. They are usually designed to pay stead dividends to conservative fixed-income investors, although they may have a growth element as well.
Real Estate Funds
These funds offer a way for smaller investors to participate in the gains from real estate without having to actually buy real property. They usually provide both growth and income.
Financial Funds
These funds invest in the financial industry. Holdings will include securities of investment, insurance, banking, mortgage, and accounting firms.
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 biotechnology and the companies that make pioneering advances in the industry.
Technology Funds
These funds attempt to provide exposure in the technology sector. This sector focuses mostly on computers, electronics, and other informational technical that is used in a wide range of application.
Communications Funds
These funds focus on the telecommunication sector, but they can also include internet-related companies as well.
Precious Metals Funds
These funds offer exposure to a variety of metals, such as gold, silver, platinum, copper, and palladium.
Reasons to 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 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 particular individual stock: the investors strongly feels that the sector is about to experience a period of strong growth.
Rather than investing directly in the stock of a company that has just released a revolutionary new tech, the investor could consider allocating assets to a tech fund that holds that company’s stock in its portfolio.
Sector funds can also serve to hedge a portfolio, as some sectors usually move opposite the economy as a whole.
Sector Fund Costs and Fees
Sector fund investors should closely monitor what they pay in terms of 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 asset base that is found in mainstream funds, such as flagship growth or income funds. As a consequence, they do not enjoy the subsequent economic scale pricing that larger funds can provide.