Best Sectors to Beat the Market in the Long Term

The 3 Best Types of Sector Funds for the Long Run

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If you want to outperform the stock market averages over time, one way to do it is to invest in the best sectors that have the greatest potential for growing faster than the overall economy in the long run. And a great way to get focused exposure these sectors is with sector funds.

Diversified mutual funds -- those that do not focus on one sector -- will already have exposure to most industry sectors. For example, an S&P 500 Index fund provides exposure to sectors, such as health care, energy, technology, utilities, and financial companies. However, if you want to beat the S&P 500, the best way to do it is by allocating more of your portfolio assets to the sectors that can be the leaders of tomorrow.

How to Choose the Best Sector Funds for the Long Term

Choosing the best sectors to buy for the future doesn't take incredible luck or a large amount of research. All it takes is a brief study of trends and a bit of common sense.

Here are some of the best types of sector funds to buy for the future:

  • Technology Sector Funds: Technology is at the forefront of innovation and at the center of the Information Age, which is sure to continue for decades. The technology sector is a category of stocks that contains technological businesses, such as manufacturers producing computer hardware, computer software or electronics and technological service industry companies, such as those providing information technology and business data processing. Some examples of technology companies include Apple (AAPL), Microsoft (MSFT), Google (GOOG) and Facebook (FB). And other tech companies are sure to come along with new innovations we are not thinking about today.
  • Health Care Sector Funds: With an aging population and rapid advances in biotechnology, the health industry is sure to thrive in the years and decades ahead. The healthcare sector is quite broad. Even a person with no investing experience can think of some specific area of the health industry, such as hospital conglomerates, institutional services, insurance companies, drug manufacturers, biomedical companies, or medical instrument makers. Also, when many industries are doing poorly due to negative economic conditions, the health industry can still perform relatively well because people still need to see the doctor and buy their drugs, regardless of economic conditions. For this reason the healthcare sector is considered a "defensive sector."
  • Financials Sector Funds: The financial services sector (aka "financials") consists primarily of banks, credit card companies, insurance companies and brokerage firms. Similar to the health sector, financials stand to benefit from the baby boom generation, who are expected to receive the largest transfer of wealth in history as their parents die and pass along their life savings to them. Financial firms that can benefit include banks, brokerage firms, and insurance companies.

Bottom Line on Investing in Sector Funds

Before buying sector funds, investors should use caution because they have higher degrees of market risk due to volatility, compared to the major market indices, such as the S&P 500. Too much exposure to one sector, especially in the form of short-term market timing, can prove harmful to an investor's portfolio.

A good portfolio strategy with sector funds is to add them as satellites to diversified core holdings. This way, you're not putting all of your eggs in one basket, so to speak -- you're simply putting a few more eggs in a few select baskets. For more information on how to build this kind of portfolio, see our article on core and satellite portfolios.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.