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®.
To implement this active approach to money management, it helps to
have a diverse group of sector funds to choose from. Fidelity
Investments manages 41 sector funds under the Fidelity Select
Portfolios® umbrella which makes this family of sector funds
well-suited for this purpose. By dividing assets across, say, 8 sector
funds in the Fidelity Select Portfolios, e.g., Fidelity Select
Biotechnology (NDQ: FBIOX), Fidelity Select Computers (NDQ: FDCPX),
Fidelity Select Energy Service (NDQ: FSESX), Fidelity Select Home
Finance (NDQ: FSVLX), Fidelity Select Medical Delivery (NDQ: FSHCX),
Fidelity Select Multimedia (NDQ: FBMPX), Fidelity Select Retailing
(NDQ: FSRPX), and Fidelity Select Wireless (NDQ: FWRLX), one can build
a customized diversified portfolio. With each of the sector fund
managers actively scouting for the best investment ideas within their
sectors, this cluster of Fidelity Select Portfolios packs a lot of
power into your diversified portfolio.
Other mutual fund families that provide a relatively wide choice of
sector funds include ProFunds and Rydex Funds. Exchange traded sector
funds such as Select Sector SPDRs, iShares, and Sector HOLDRS, that
trade on the American Stock Exchange, can also be used to construct
diversified sector fund portfolios.
The wide selection of sector funds available provides you with the
ability to take advantage of changing market conditions and
continually optimize the risk-reward characteristics of your
diversified portfolio. To employ this approach effectively, you need
to understand and follow the dynamics of the individual sectors. You
must also be able to make informed decisions on sectors to select and
sectors to avoid. At the end of the day, you should be right more
often than wrong with the sectors you select.
AlphaProfit.com's research suggests that by constructing diversified
mutual fund portfolios using sector funds, investors have the
potential to outperform the market averages on the basis of relative
returns as well as risk-adjusted returns. The track-record of
AlphaProfit's model portfolios indicates the potential of this
approach.
A Caveat
Diversification is one of the cornerstone principles of mutual fund
investing. Sector funds that focus on high-growth sectors or narrow
niches of the economy tend to be volatile. It is generally not
advisable to commit a substantial portion of your total assets to a
single sector fund. Maintaining adequate diversification across
sectors in your overall mutual fund portfolio is good investing
practice.
Key Points to Remember
1. Sector funds are investment vehicles that focus their investments
on a particular sector or industry group. Sector funds provide
investors with an opportunity to profit from trends impacting a
particular sector or industry while reducing company-specific risks.
2. High-potential diversified portfolios can be constructed by
dividing assets among a group of sector funds. This active investment
approach requires investors to make informed decisions on sector
selection. The power-packed cluster of sector funds may offer
investors the potential to outperform the market averages.
3. Diversifying mutual fund portfolios across sectors is good
investing practice.
Notes: This report is for information purposes only. Nothing herein
should be construed as an offer to buy or sell securities or to give
individual investment advice. This report does not have regard to the
specific investment objectives, financial situation, and particular
needs of any specific person who may receive this report. The
information contained in this report is obtained from various sources
believed to be accurate and is provided without warranties of any
kind. AlphaProfit Investments, LLC does not represent that this
information, including any third party information, is accurate or
complete and it should not be relied upon as such. AlphaProfit
Investments, LLC is not responsible for any errors or omissions
herein. AlphaProfit Investments, LLC disclaims any liability for any
direct or incidental loss incurred by applying any of the information
in this report. The third-party trademarks or service marks appearing
within this report are the property of their respective owners. All
other trademarks appearing herein are the property of AlphaProfit
Investments, LLC. Past performance is neither an indication of nor a
guarantee for future results. No part of this document may be
reproduced in any manner without written permission of AlphaProfit
Investments, LLC. Copyright © 2004 AlphaProfit Investments, LLC. All
rights reserved.
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