Home
>
Stocks & Mutual Fund
>
Using Sector Funds to Construct Diversified Mutual Fund Portfolios

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

'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 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.

About The Author

Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the ValuM? Investment Process for managing investments. He edits the AlphaProfit Sector Investors' Newsletter?. For the 5 year period ending December 31, 2003, AlphaProfit model portfolios increased by up to 288%, a compound annual return rate of 31%. To learn more about AlphaProfit and to subscribe to the FREE newsletter, visit: alphaprofit.com

Lincoln Stretch rentals Alsip ..

In The News:

Fitness centers and workout studios are starting to establish policies that prohibit shooting phone videos to protect people's privacy.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents

Apple recently notified a small number of iPhone customers in 92 countries that their phones may be under attack by mercenary spyware.

An artificial intelligence-powered home security system can fire paintballs and tear gas at trespassers. The camera identifies human faces and animals.

Technology expert Kim Komando gives her tips and tricks on enhancing your user experience a smartphone and other devices you use everyday.

A new camera called NUCA uses artificial intelligence to create deepfake photos of subjects by stripping away clothing in close to real time.

The Kimberley Kube trail-ready camper has a compact but spacious design and combines luxury, functionality and ruggedness for a weekend getaway.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Emails instructing you to reset your password for an account may be legitimate, or they may be scams. Kurt "CyberGuy" Knutsson explains.

Northrop Grumman's Manta Ray uncrewed underwater vehicle aims to revolutionize undersea missions — it glides through the ocean without human assistance.

Learn how to work Google's calendar application to streamline and organize your daily tasks from technology expert Kim Komando.

If you do not want Facebook to have automatic access to your private photos, follow our tips to protect yourself. Kurt “CyberGuy" Knutsson shows you how.

Kurt “CyberGuy" Knutsson goes into detail about Apple’s recent iOS update that allows iPhone users to instantly translate spoken language simply by using the Action Button.

Safeguarding your digital life with a reliable physical backup isn't just a precaution, it's a necessity. Kurt “CyberGuy" Knutsson provides the essential backup checklist.

Kurt “CyberGuy" Knutsson reveals how a Redditor exposed false recycling claims at their apartment, highlighting a report that only 21% of U.S. recyclables are processed.

Kurt "CyberGuy" Knutsson offers a travel toolkit featuring five technology tools to help you with booking flights and hotels for your summer vacation.

The bubble behind the clock on your iPhone can appear in different colors. Kurt "CyberGuy" Knutsson explains what each of those colors mean.

Scammers are using the power of artificial intelligence to mimic voices of people and are using the fake voices to commit crimes, like kidnappings.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Tech guru Kurt "CyberGuy" Knutsson explains the science behind the Invisibility Shield, a 6-foot shield that makes people become invisible.

The International Olympic Committee on Friday announced plans to use AI in various Olympic aspects, including athlete identification, training and judging.

Tech guru Kurt "CyberGuy" Knutsson explains an easy trick to avoid squinting while working or surfing the web by zooming in on your personal computer.

Streaming giant Roku has recently been targeted by a pair of cyberattacks, and the company confirmed over a half million Roku accounts were compromised.

The Land Aircraft Carrier combines an all-terrain, six-wheeled vehicle with a two-seat aircraft, which features electric vertical takeoff and landing.

The European Union has sent TikTok a "request for information" on the video sharing platform's newest app, TikTok Lite, under the Digital Services Act, with the aim to clean up social media.

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

Stocks & Mutual Fund