Sector funds defined

A sector fund is a professionally managed portfolio of stocks concentrated in a particular market sector or group of industries, such as health care, communications, biotechnology, natural resources, utilities or real estate. Sector funds allow investors to participate in the growth opportunities of a particular sector without having to select individual stocks themselves. Because of their specific focus, sector funds are generally best used as a complement to a well-diversified portfolio.

Why invest in sector funds?

High return potential. Sector funds offer investors a way to focus their investment on industry sectors with strong growth prospects. Because sector funds employ concentrated investment strategies, they can offer greater potential returns than more broadly invested portfolios.

Diversification. Sectors react differently during economic expansion and contractions. Adding investments from different sectors may help you take advantage of the rotating economic cycles.

Sector funds can be volatile

It's important to remember that potentially higher returns involve a higher degree of risk to principal. Sector funds concentrate heavily in one segment of the economy. And, since stock prices of companies from similar industries tend to move in the same direction, the funds can be more volatile than funds with a broad mix of investments. For these reasons, it's especially important to keep a long-term perspective.