Mark Twain, always one to upend cliches and conventional wisdom, offered this advice: "Put all your eggs in one basket, and watch that basket." That could be an ad campaign for
If you want to place a bet on genomics stocks, B2B stocks, wireless stocks or whatever the white-hot sector is this week, sector funds are one of the easiest ways to do so.
Sector mutual funds focus their stock investments on one industry or segment of the economy, such as utilities companies or technology companies. In the past few years -- as one sector raced ahead of the pack only to be quickly passed by another in "Indian Runner" fashion -- there has been an explosion of sector funds to chase the hot money. Mutual fund companies have scrambled to offer investors opportunities to make targeted investments in just about any sector of the economy.
Unlike broad-based mutual funds, sector funds aren't necessarily about diversity. Because stocks within one sector often move in tandem, the double-edged sword nature of sector funds is pretty apparent: If you invest in a sector fund when that sector is hot, you'll see big gains. If you buy in when that sector is on the skids, things can get pretty ugly.
When investing in sector funds, the standard guidelines for mutual funds become doubly important. It is vital that the fund manager, as well as the research staff, have a thorough understanding of the particular sector in which they invest. Likewise, investors need to pay close attention to the mutual fund's investment principles, which should be listed in the fund's prospectus.
Why is this important? Well, there are more than 100 tech sector funds, and not all of them are the same. One tech fund may narrow its focus to only, say, Internet e-commerce companies, while another tech fund may allow itself to invest in all sectors of technology -- software, Internet, wireless communications, etc. Investors need to be sure the fund's level of stock-picking concentration matches the individual's investment aims.
With sector funds taking an increasingly large slice of the mutual fund world, it's good to know the lowdown.
Personal Finance section examines what's new in the burgeoning sector fund arena. Following are several articles that give the big picture on funds with a narrow sector focus:
Plying the Power Lines
T. Rowe's Gensler Smells Cash in Telecom
Energy Funds Shrug Off Talk of a Bubble