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Thanks to spiking performance and record cash flows, the rash of new health care funds has hit epidemic proportions.

Skyrocketing biotechnology stocks have pushed the health care category far ahead of other sectors this year. Through June 30, investors stuffed more money into health funds than they have in any full calendar year ever. Not surprisingly, that's motivated a record gush of new health care funds, many focusing on sizzling but risky biotech shops -- cutting-edge firms that primarily develop new drugs.

Betting heavily on a narrow band of stocks within one sector is about as risky as fund investing gets, but the unprecedented flow of new health care funds probably won't slow as long as the cash flows into the category also remain unprecedented. It's a familiar pattern most recently

witnessed among tech sector funds.

But setting up funds to chase performance in narrow sectors comes with a big potential downside. When last year's sweet spot turns sour, you're stuck with a weak-performing fund with little wiggle room -- witness the lousy performance of many Internet funds this year after rolling out during the heady Net days of 1999.

"It's the same pattern we just saw in tech funds. A sector heats up and investor dollars go in. Then the fund companies launch funds to capture that money," says Jonas Max Ferris, co-founder of

MaxFunds.com

, a fund-tracking Web site.

"When a sector is really strong, fund companies jump on the bandwagon," says Emily Hall, the

Morningstar

analyst who focuses on health care funds.

To connect the dots: It all starts with performance. So far this year health care funds are lapping other sector fund categories, including tech funds.

Much of the sector's performance has been driven by biotech stocks. So far this year the

American Stock Exchange Biotechnology Index

is up 91.8% after rocketing to a 111% return in 1999, according to

Baseline

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. The

American Stock Exchange Pharmaceutical Index

, which contains bigger drug makers and marketers like Pfizer, is up 13.8% this year after losing some 10% last year.

Even with that kind of uneven performance, investors have stuffed money into the sector at a record rate. In the first six months this year they've invested $8.7 billion in health care funds, according to Boston fund consultant

Financial Research

, already eclipsing 1998's calendar-year record of $5.1 billion.

And nothing spurs fund marketers to action like a river of greenbacks. A year ago, there were 30 health care funds and since then at least 14 more have gushed from fund companies' new product pipelines -- 11 this year alone -- and more are in development. The prior record for new health funds launched in any calendar year was six in 1998, according to Morningstar.

To be fair, there is a real growth story in the health care sector. Most investors and observers point to a large and aging baby boomer population whose demand for health care could no doubt boost the sector's profits. And then there's the promise of the

Human Genome Project

-- a private-public effort to map the human genome and trace diseases to their roots -- that is one of the primary drivers of interest in the biotech sliver of the health care market.

That said, many of these new funds are even more risky than the average sector fund because they focus on biotech -- six of the rookies have "biotech" in their names and many others focus on the sector. Maybe the most focused on the new funds is GenomicsFund.com, up 71% over the last three months, which focuses on genomics firms that are just one part of the biotech industry.

While biotech is certainly the industry of the moment, that focus is sure to shift. Consider that from January 1993 to January 1998 the Amex biotech index rose just a cumulative 5.6%, while an investment in an

S&P 500 index fund would have more than doubled over the same period. In 1993 and 1994 the biotech index suffered annual losses of 18.7% and 33.3%, respectively.

"The narrower the fund's mandate, the more its volatility grows exponentially," says Phil Edwards, managing director of

Standard & Poor's

funds unit.

"If a fund is investing in only part of the health care sector, like biotech, it's probably not appropriate for most investors," says Morningstar's Hall.

The growth and risk of biotech funds parallel the rush of funds that focus on Internet stocks. Many of these funds posted boffo returns when the subsector was hot, but now many are boxed into a sagging and narrow band of stocks. Consider the

(WWWFX) - Get Kinetics Internet NL Report

Internet fund, which posted 196% and 216% returns in 1998 and 1998, respectively, but is down 28.9% since Jan. 1, trailing nearly every other tech fund, according to Morningstar.

Likewise, the

(TEFQX) - Get Firsthand Technology Opportunities Report

Firsthand e-Commerce fund was launched last Sept. 30 and raced out to a 48.6% return in the frothy fourth quarter. This year it's down 11.9%, trailing almost 90% of its tech-fund peers.

Despite these risks, sector funds are

playing a bigger role in mutual fund investing and fund investors' portfolios. From 1990 to 1998 sector funds, which most advisers limit to 5 or 10% of their clients' portfolios, never accounted for more than 4.8% of total cash flows to U.S. stock funds. But last year they comprised 19.9% and through the first six months of this year they make up about 33 cents of every dollar invested in U.S. stock funds.

"The real story here is the continuing emergence of sector funds as a substantial part of the fund marketplace," says Burt Greenwald, a Philadelphia fund consultant with more than 40 years of industry experience.

Given the glut of new funds and the range of risk profiles, Morningstar's Hall advises investors to "not just jump on the first health care fund they see."

If you're looking for a health care fund that takes the broad approach to the sector, Hall recommends the category's no-load behemoth, the $14.3 billion

(VGHCX) - Get Vanguard Health Care Inv Report

Vanguard Health Care fund or the $2.7 billion

(FSPHX) - Get Fidelity Select Health Care Report

Fidelity Select Health Care fund, which carries a maximum 3% sales charge.