Mutual Funds Sector Funds

Investing for the long-term using sector mutual funds

Mutual funds sector funds were extremely popular in the mid to late 1990s. Even in today’s market, mutual fund sectors can be a great way to make money using a portion of your investable assets.

To start, you should know that mutual funds sector funds are different from ETFs (exchange traded funds). Although both can be approaches to investing in one specific industry, they trade differently. When considering an investment in mutual fund sectors, keep the following in mind:

1. If you are seeking a long-term investment in a particular industry, sector mutual funds are a great way to go. Due to the costs associated with mutual funds, if you are looking to day-trade in a particular sector, industry-specific ETFs may be more appropriate.

2. Like any other mutual fund, if you are investing in a non-retirement account, capital gains and dividend distributions are taxable.

3. All mutual fund prospectuses have some form of the following statement: “Past performance is not an indication of future performance”. With sector funds, this statement holds particularly true because the fund is legally bound to only buy within that sector, so if the sector heads south, so do the fund’s returns.

 

Find a list of sector funds that meet your criteria

Some well-known money magazine websites will sort through the vast array of sector mutual funds for you and can narrow the list of sector funds based on performance and other criteria you set.
Try: CNN Money and Kiplinger allow you to select the specialty (sector) and other criteria to sort your results. Morningstar has a free trial with a professional grade screening tool that may help in narrowing your choices.

Research fund companies that carry the best sector mutual funds

It is important to find a fund company that not only meets your criteria for any one particular sector mutual fund, but that also has a good reputation with other sector funds as you may wish to switch your money to another sector someday. Generally it is easier and less costly to move your money between mutual funds at the same company than to move money to another company.
Try: Fidelity Investments, Vanguard and T. Rowe Price are well-known companies that carry a variety of sector mutual funds.

Understand the pricing, costs and fees associated with the sector mutual fund you have chosen.

There was a time when some sector funds were forward-priced hourly throughout the market day. These days, most, if not all, sector mutual funds are simply forward priced once a day. Like any other mutual fund, you never truly know what price you are going to get. With a sector mutual fund, you can have a general idea of the price based on the last price (on the business day prior) and how the stocks in that particular industry performed on the day you placed your purchase of the fund. You should also be aware that most mutual fund companies charge a fee to exchange between sector funds and many companies charge a front-end load as well as management fees.
Try: Read the fund's prospectus and see the fund company's website for fees associated with the individual sector mutual fund. Websites such as FinancialWeb and the Investment Company Institute offer detailed information on how mutual funds are priced daily.

 

• When investing in one sector, it is important to realize the risks involved and to only invest a portion of your assets in one sector. Seek professional advice if you are unsure of how much of your portfolio should be concentrated in one sector fund and which sectors may be more risky than others.

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