Sector Investing Process

Sector investing harnesses the potential of sector funds through sector rotation to create wealth.

Sector Funds

Sector funds focus their equity investments within a specific sector or industry of the economy. Sector funds offer potential for above average returns in both good and bad years.

Here are the total returns for a representative group of Fidelity Select funds from 2003 to 2007 (fund with highest return for the year in yellow).

Year	Brokerage	Electronics	Energy Svce.	Materials	Med. Dlvy.	Utilities Gwth.	DJW 5000 Idx.
2000	28.3%	-18.0%	50.3%	-5.4%	67.8%	-13.6%	-10.9%
2001	-9.2%	-14.7%	-21.0%	7.8%	-2.3%	-21.9%	-11.0%
2002	-17.2%	-50.5%	-0.7%	1.0%	-12.1%	-30.4%	-20.9%
2003	36.5%	71.9%	7.6%	50.3%	30.2%	26.4%	31.6%
2004	13.0%	-9.8%	34.9%	13.0%	45.5%	24.2%	12.6%
2005	29.9%	15.8%	54.1%	14.3%	29.0%	9.4%	6.3%
2006	21.3%	0.3%	8.6%	19.5%	-1.6%	30.1%	15.9%
2007	-0.2%	4.7%	55.2%	29.2%	16.9%	18.1%	5.7%

As seen here, some sector funds substantially outperformed the broad Dow Jones Wilshire 5000 index in good years. Some sector funds bucked the broad market decline and provided positive returns even when the DJW 5000 declined. Conversely, some sector funds declined when the DJW 5000 gained.

Harnessing Sector Investing through Sector Rotation

Illustrative Example

To harness the potential of sector investing, you need to invest in the right sector funds at the right time. Equally important, you need to avoid sectors funds that end up delivering poor performance.

Sector rotation is an investment process where the investor seeks to increase returns by opportunistically switching from one sector to another, thereby earning returns in excess of those earned by buy-and-hold investors.

Sector rotation offers the potential for creating wealth over the long-term. Referring to the table above, an investor with perfect foresight of investing only in the best performing fund each year will have a 1321.8% return vs. a 21.3% return for the buy-and-hold Dow Jones Wilshire 5000 Total Market Index investor.

Sector investing entails opportunistic switching of assets among sector funds through sector rotation. The returns from sector rotation could potentially exceed the returns earned by buy-and-hold investors.

The sector rotator opportunistically switches $129 resulting from the investment of $100 in sector fund A to sector fund B and grows the investment to $183. The $183 investment value exceeds the result buy-and-hold investors achieve by investing in sector fund A ($107) or sector fund B ($149).

Investing in Sector Funds

Mutual funds as well as exchange-traded products like ETFs are available for investing in sectors. Investors can use these sector focused investment products in different ways:

Use sector funds to construct diversified portfolios. Our research shows that sector funds are attractive investment vehicles that can be used to construct diversified portfolios to deliver superior returns. This principle is exemplified by the AlphaProfit Core™ Portfolio.
Include sector funds as return enhancers of diversified portfolios. The reward potential of sector funds lends them to be used as 'return enhancers' of portfolios that are already adequately diversified. The AlphaProfit Focus™ Portfolio illustrates this potential of sector funds.
Profit from opportunistically investing in sector funds. From time-to-time, the market may create attractive opportunities to profit by investing in sector funds. AlphaProfit assigns 'Favored Buy' ratings on sector funds to highlight such sector investing opportunities.

By subscribing to the AlphaProfit Sector Investors' Newsletter™, you harness the potential of sector investing through AlphaProfit's structured sector rotation process.

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See: Investing in Mutual Funds and ETFs
Long-Term Performance of AlphaProfit Core and Focus Portfolios

Note: The performance results reported here are for illustrative purposes. They do not account for tax impact. Past performance is neither an indication of nor a guarantee for future results.

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