Five Sector Funds You'll Need in 2007

When: Buy now. Hold until the March seasonal slump in oil prices kicks in.

What: Oil Service HOLDRs(OIH Quote). I know that these are oil-service stocks rather than the shares of oil producers and that technically a HOLDR is different from an ETF. But I still think this is the best basket-bet for profiting from this quarterly trend.

By buying this HOLDR, a small group of stocks picked by Merrill Lynch and not an index, you get much more exposure to international oil (the driver for the oil-drilling earnings) than in U.S.-dominated ETFs like Energy Select Sector SPDR(XLE Quote), iShares Dow Jones U.S. Energy(IYE Quote) or Vanguard Energy ETF(VDE Quote). And you also get more volatility, which is good when the market is going up.

You'll own a basket with stocks such as Diamond Offshore Drilling(DO Quote), with a beta of 1.23, instead of Exxon Mobil(XOM Quote), with a beta of 0.76. (Stocks with a beta above 1 move up faster than the market as a whole in a rally.)

Homebuilders

Why: The stock market is starting to look past the downturn in home sales and to anticipate a recovery in the second half of 2007. The sector is by no means out of the woods. Building permits, an indicator of future home starts, fell 3% in November. But inventories are starting to edge downward in some regions, and housing starts climbed 6.7% in November to an annualized rate of 1.59 million, up from 1.49 million in October and above the 1.55 million expected by economists for November.