Last April,

Rydex

introduced 13 sector funds to rival

Fidelity's

lineup of 39 Select funds. After a year in operation, the Rydex funds have proved to be popular vehicles for frequent traders. But when it comes to returns, Fidelity Select funds are still hard to beat.

The Select funds, introduced in 1981, each levy a 3% sales charge while the Rydex sector funds are no-load. But even on a load-adjusted basis -- that is, subtracting the cost of the sales charges from returns -- Select funds, as a whole, still slightly outperformed their Rydex counterparts.

On average, the 13 Rydex sector funds introduced last April (the 14th, Rydex Consumer Products, was launched in July) returned an average of 14.7% over the past 12 months. Fidelity's 13 comparable Select funds returned an average of 16.7% on a load-adjusted basis, according to

Lipper

.

Fidelity's margin of victory is hardly an embarrassment for Rydex. Five of its funds beat their Fidelity counterparts, two by wide margins.

While the difference in returns is relatively small, the gap between the two fund families' sector philosophies is much larger.

Though short-term investors have flocked to the Select funds, Fidelity isn't encouraging them, says spokeswoman Jessica Johnson. In fact, a 0.75% redemption fee for shares sold within 29 days of purchase is intended to discourage sector timing. (After 30 days, the redemption fee is a flat $7.50.)

Frequent trading can increase a fund's costs by forcing it to keep cash on hand or to sell stock to meet redemptions. That selling can result in extra brokerage fees and increase the tax liability of remaining shareholders if it causes a fund to realize capital gains.

But Fidelity isn't exactly shooing away short-term investors, either. They are tolerated because the redemption fees they pay are added to the funds' assets to cover the costs associated with short-term trading. "The structure allows for shareholders who choose to trade sector funds to do so, but not to the detriment of long-term shareholders," Johnson says.

Rydex funds, on the other hand, actively encourage trading within the fund family. Rydex's flagship

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Nova fund, an enhanced

S&P 500

index fund, has been a vehicle for market timers since its inception. Rydex imposes no penalties for trading within the fund family. In fact, on

FundVision.com

, an Internet chat board catering to market timers, the RAL, or Rydex Asset Level, is used as an indicator of sentiment among short-term fund traders.

Mike Byrum, lead portfolio manager at Rydex, says his sector funds can be good vehicles for investors focused on sector rotation, or moving money from one sector fund to another, rather than market timing, a more aggressive strategy of being either fully invested in the market or 100% in cash.

The funds were established with the idea of sector rotation in mind, Byrum says. And while the sector funds aren't index funds, he tries to make sure the portfolios closely represent their respective sectors. He and his team pick stocks for the sector funds using quantitative methods, then fine-tune. "We'll create a portfolio and then tighten it up around the edges, so to speak," he says.

That approach contrasts with Fidelity's Select funds, which are put together, like most funds at Fidelity, based on their managers' stock-picking ability.

Fidelity Select funds are known for another kind of rotation -- of their portfolio managers. Typically a proving ground for young analysts, Fidelity Select funds rarely have the same manager for more than two years. As of March 31, the most senior Select manager, Scott Offen of

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Select Food and Agriculture, had been running his fund since November 1996.

"That's where they break in their kids," says Stephanie Kendall, an analyst at fund tracker

CDA/Wiesenberger

.

But the constant game of musical chairs hasn't hurt the funds, she notes. For example,

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Select Electronics has been through four managers since 1992, but its return during that period still averages a hefty 36.4% a year.