Using Sector Funds to Construct Diversified Mutual Fund Portfolios
Sam Subramanian PhD, MBA
High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This approach
gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes.
'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
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
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.
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.
Rollover IRA: 401k Retirement Plans' Booster Rocket, Rollover IRA
No Load Mutual Funds: Boost Your Portfolio's Returns
Protect & grow your wealth with
investment recommendations from free
e-letter AlphaProfit MoneyMatters
By Hulbert #1 rank winner Dr. Sam Subramanian
'Incisive Insights, Impressive Results' - Jim Woodruff
About AlphaProfit MoneyMatters and AlphaProfit
AlphaProfit MoneyMatters is a free e-letter distributed to registered users of AlphaProfit's website. The e-letter analyzes the economy, markets, and sectors and provides money-making insights on stocks, exchange-traded funds, and mutual funds.
AlphaProfit MoneyMatters is edited by Dr. Sam Subramanian acclaimed for his financial acumen and analytical skills.
AlphaProfit Investments, LLC is an independent investment research firm based in Sugar Land, TX. AlphaProfit publishes the AlphaProfit Sector
Investor's Newsletter, edited by Dr. Sam Subramanian. Leveraging sector funds, the Newsletter provides high-performance model portfolios
with Fidelity funds and exchange-traded funds.
It also includes actionable stock recommendations. This newsletter features among MarketWatch's top 10 investment newsletters and has won
the coveted #1 rank from Hulbert Financial
Copyright Policy and Fair Use Guide
You are welcome to quote a short excerpt of the article not exceeding 100 words with attribution in the form of a hyperlink to the article's
full URL or http://www.alphaprofit.com. If you wish to republish the article in full on
your website, blog, or other media, you must obtain permission.
AlphaProfit MoneyMatters™ is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual advice on investing. Factual material is obtained from sources believed
to be reliable and is provided without warranties of any kind. AlphaProfit Investments, LLC is not responsible for any errors or omissions. AlphaProfit Investments, LLC neither is associated with nor receives any compensation from any
of the investment companies, brokers or entities connected with the securities mentioned herein. Please review our Terms and Conditions of Use and Subscriber Agreement which is available on our website at
www.alphaprofit.com; they govern your relationship with AlphaProfit Investments, LLC, including, but not by way of limitation, use of the AlphaProfit MoneyMatters.
This page is best viewed in 1024 by 768 pixels screen resolution or higher.
Copyright © 2004 AlphaProfit Investments, LLC. All rights reserved.