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Sector Investing: Sector Funds and Sector Rotation

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

Sector funds focus their equity investments within a specific sector or industry of the economy. Stock prices of companies within a sector or industry move together due to causal factors. Examples of such factors include introduction of new technologies or products, changes in consumer demand or demographics, or increase in merger & acquisition activity.

Impacted by above-mentioned factors, the share price performance of a sector or industry can be markedly different from that of a broad index like the S&P 500. Sector returns highlighted in yellow indicate those of the year’s best Fidelity Select Fund picked by AlphaProfit’s prescient ValuM investment process for inclusion in the sector model portfolios.

Year Brokerage Gold Oil & Gas E&P Technology Utilities S&P 500
2006  21.3%  25.4%   5.2%    7.5%  30.1%  15.8%
2002 -17.2%  64.3%  -9.6%  -37.8% -30.4% -23.4%
2000  28.3% -18.3% 71.0%  -31.8% -13.6% -10.1%
1999  30.6%    8.4% 26.2% 132.4%  26.5%  19.5%
1997  62.3% -39.4%  -8.1%   10.2%  30.3%  31.0%

Returns of Fidelity Select Funds that invest in the above listed sectors or industries are used as measure of the sector’s or industries’ share price performance.

The ValuM process enables subscribers to add value to their accounts in both bull and bear markets.

  • 1999 bull market: 132.4% gain from technology (FSPTX) far outpaces the S&P 500’s 19.5% advance
  • 2002 bear market: 64.3% gain from gold (FSAGX) bucks the S&P 500’s 23.4% loss

Harnessing Sector Investing through Sector Rotation

Given the wide variation in returns of individual sectors, one needs to invest in the right sectors at the right time to harness the potential of sector investing.

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.

The chart below illustrates how AlphaProfit subscribers enhanced their return by 28% by switching from Health Care Providers (FSHCX) to Consumer Staples (FDFAX).SectorRotationAtWork

Timely sector rotation increased the value of investment accounts starting at $10,000 to $15,507, nearly $2,800 more than buy-and-hold investors staying either in Health Care Providers, Consumer Staples, or the S&P 500 index fund.

Prudent sector rotation offers significant potential to grow wealth over time. As shown above, an index investor adds wealth at a 10.2% annual rate during the two-year period. In comparison, an AlphaProfit subscriber adds wealth at a 24.5% annual rate. Assuming the AlphaProfit subscriber and index investor add wealth at 24.5% and 10.2% annual rates, respectively for another three years, their accounts starting at $10,000 will be worth $29,938 and $16,228, respectively. In other words, AlphaProfit subscriber adds $13,710 or 137% in value.

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:

  1. Use sector funds to construct diversified portfolios. 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.
  2. 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.
  3. 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 sectors to highlight such sector investing opportunities.

By prescient sector selection and prudent sector rotation, AlphaProfit enables subscribers to harness the reward potential of sector funds.


Must-read Articles on Sector Investing

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

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 Mutual Funds: How to Pick Winning Sector Funds and Avoid Losers

If you are looking to earn great returns from the stock market sector mutual funds are right up your alley. Sophisticated investors recognize the potential sector mutual funds offer and know how to make such funds work for them. You can consistently beat the market by investing in the right sector mutual fund at the right time. In fact, you can make money even in bear markets.

Sector ETFs: Invest in the Best Sector ETF Consistently

Sector ETFs are among the most potent investment vehicles that allow individual investors to exploit advantages previously available only to large institutions. You can beat the market by investing in the right sector ETF at the right time. In fact, you can actually make money even when the overall market is tanking. However all too often, investors use sector ETFs inappropriately and get their fingers burnt.

New ETF and Mutual Fund Recommendations

ETF Mutual Fund RecommendationsThe Fidelity and ETF Core and Focus model portfolios have gained at annualized rates of 14.6% and 17.8%, respectively since 1994. The model portfolios will be repositioned with new mutual fund and ETF recommendations on Friday, June 28. Learn more about AlphaProfit's Free and Premium Service investment newsletters.

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