List of Sector Funds
Technology, Financials, Consumer Cyclicals, Consumer Staples, Utilities & Health
This is a two-page list of industrial sectors that provides some of the best funds and ETFs for investing within each respective industry as well as simple definitions and examples for each sector. Most of the funds listed are index funds and ETFs because these fund types typically provide the best exposure to the respective sector in terms of broadness, diversity and below average expense ratios.
This first page includes the consumer-driven and defensive industries of Technology, Financials, Consumer Cyclicals, Consumer Staples, Utilities and Health Care.
Technology Sector Funds
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, Microsoft, Google and Netscape Communications.
Finding the best technology sector funds and ETFs can be difficult and misleading. For example, it is a common mistake to think of the Powershares QQQ ETF as a pure technology fund because it tracks the NASDAQ 100 Index. This can be considered a pure growth investment strategy but QQQ holdings in technology only represents around 50% of the portfolio.
Also, many technology sector funds focus on one sub-sector of technology, such as computers, networking, semi-conductors, or electronics. However, it is best for most investors to use a broadly diversified technology sector fund.
For funds that hold at least 90% technology stocks (as of this writing), one of the best sector mutual funds is Fidelity Select Technology (FSPTX) and one of the best technology ETFs is iShares US Technology ETF (IYW).
The financial services sector (aka "financials") consists primarily of banks, credit card companies, insurance companies and brokerage firms. Examples include Bank of America, Wells Fargo, Goldman Sachs, and MetLife. Strategically, financial stocks do best in a low interest rate environment when financial services, such as mortgages, loans and investments, are in demand.
There are more than 100 mutual funds and ETFs that specialize in financials but one of the best financial sector index funds is Vanguard Financials Index (VFAIX) and one of the best ETFs is iShares US Financial Services (IYF).
Consumer Cyclicals Sector Funds
Consumer cyclical goods or services are those that are not considered necessary. Also called leisure or discretionary goods and services, their consumption is dependent upon economic cycles, hence the name consumer cyclical.
For example, during periods of economic growth retail sales of leisure goods or services, further categorized as durable or non-durable, such as automobiles and hardware (durables) or entertainment and hotels (non-durables), are typically higher than in times of economic recession, when only the primary consumer staples goods may remain in demand. Put simply, consumers spend more on luxury (non-necessary) items when times are good and less on these items when times are tough.
As with most sector funds the Consumer Cyclicals sector has several sub-sectors. For example an investor can buy shares of a specific cyclical stock sector fund that concentrates only in the automotive industry. However most investors are wise to get broader exposure to sectors by choosing the diversity of index funds and ETFs.
Consumer staples are products, such as food, tobacco, and beverages, that consumers consider to be essential for day-to-day living. Therefore stocks of companies that produce such products are said to be "defensive" or "non-cyclical" stocks because consumers are unwilling to stop buying and consuming the products even during economic recession. Examples of consumer staples companies include General Mills, Inc (food), Philip-Morris, Inc (tobacco) and Coca-Cola Co (beverages).
Consumer staples stocks are considered defensive stocks because they tend to maintain more price stability in a down market than other stocks, such as growth stocks. For example, during a recessionary period, consumers still need staples, such as cereal and milk, or they may even increase consumption of so-called "sin stock" products, such as cigarettes and alcohol. Knowing this, many investors will buy defensive stocks when they believe recession is likely to occur in the short-term.
A good way to get broad exposure to the Consumer Staples sector is with the diversity and low expenses of an index fund or ETF. One of the best consumer staples index funds is Vanguard Consumer Staples Index (VCSAX) and among the best ETFs is Consumer Staples Select Sector SPDR (XLP).
Utilities Sector Funds
Utility is an economic term that generally refers to the ability to satisfy needs or wants; it describes the usefulness of a good or service. For this reason, companies that produce a good or service that provides utility to consumers are classified under the industrial sector of Utilities.
You are already familiar with utilities in your day-to-day life and likely associate the term with your "utility bills," which go to pay for everyday services, including the public utilities, such as phone, gas, water and electric.
With regard to investing, and according to Morningstar, "Utilities fund portfolios seek capital appreciation by investing primarily in equity securities of U.S. or non-U.S. public utilities including electric, gas, and telephone-service providers." In simpler terms, utilities funds are sector funds that invest in stocks of companies within the utilities sector.
Utilities stocks are also considered defensive stocks because they tend to maintain more price stability in a down market than other stocks, such as growth stocks. For example, during a recessionary period, consumers still need services, such as gas, phone and electric. Knowing this, many investors will buy defensive stocks when they believe recession is likely to occur in the short-term.
As with most industrial sectors, there are sub-sectors within the general category of utilities. For example, if an investor wanted concentrated exposure to phone companies, such as Verizon and Comcast, they may consider a mutual fund like Fidelity Telecom and Utilities (FIUIX). However sector funds are already concentrated and sub-sectors can be too narrow and thus more risky. So it is wise for most investors to take advantage of the diversity and low expenses of an index fund or ETF, such as Utilities Select Sector SPDR (XLU).
Utilities stocks are also known for paying dividends. So if you are looking to add dividend mutual funds to your portfolio for income, you may consider adding a utilities sector fund.
Healthcare, also known as health or specialty-health, is a stock investing sector that focuses on the healthcare industry. 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. Examples include Pfizer, United-Healthcare, Cigna Corp, Abbott Laboratories, and HCA Holdings, Inc.
Investors can use health sector funds as a tool to diversify a larger portfolio of mutual funds. The health stocks are often considered "defensive" stocks because of their relatively low correlation to broad stock index funds, such as S&P 500 Index Funds, that many investors use as core holdings in a diversified portfolio. 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.
Health care has also been at the center of political debate and divide many times in recent history because the costs and accessibility of health care are passionate and personal topics for voters. Congressional legislation can positively or negatively impact some sub-sectors of healthcare. Also, expiring drug patents for widely used pharmaceuticals can negatively impact a drug manufacturer or, conversely, an FDA approval of a breakthrough drug can have positive impact. A recent example of political impact on health stocks is the Affordable Care Act, commonly known as Obamacare, passed by Congress during the Obama administration.
Some stocks advanced, such as hospital corporations while others declined, such as insurance providers. However, the overall net effect on the broad health sector was minimal. This speaks to the wisdom of diversification of mutual funds, index funds and ETFs that provide broad exposure to the health industry.
This second page listing of sectors includes the similar and overlapping areas of precious metals, gold, commodities, natural resources, and energy. For good measure, this page also includes the transportation sector and socially responsible funds.
Most mutual funds in the Precious Metals category invest primarily in mining company stocks. However, some do own small amounts of gold, silver, copper or platinum, usually in the form of bullion coins. Precious-metals companies are typically based in North America, Australia, or South Africa.
Some investors prefer to buy precious metals, such as gold, silver, platinum and copper, in the physical form of bullion coins. Others prefer to buy shares of mining company stocks or mutual funds, ETFs and ETNs.
Commodities precious-metals portfolios invest in precious metals such as gold, silver, copper, platinum, and palladium. Investment can be made directly in physical assets or commodity-linked derivative instruments. Most commonly, investors gain the most exposure to precious metals is through a sub-category of commodity-precious metals Exchange-Traded Funds (ETFs).
Investors can also us Exchange-Traded Notes (ETNs). It is important to note that ETNs are debt instruments, like bonds, that do not invest in any asset. Although linked to the performance of a market benchmark, ETNs are not equities or index funds; they combine the qualities of bonds and Exchange Traded Funds (ETFs).
The most common means of buying gold is either in bullion gold coins or through a bullion Exchange Traded Fund (ETF) such as the SPDR Gold Shares (GLD). Mutual funds invest little to no assets in physical gold. Usually categorized as "Precious Metals," gold mutual funds typically hold stocks of mining companies. A few of the best gold mutual funds, in terms of long-term performance, long manager tenure and average to low expense ratios include Tocqueville Gold (TGLDX) and Gabelli Gold Load-Waived (GLDAX.LW).
If you want the most direct exposure to silver, you will use a silver Exchange Traded Fund (ETF), such as iShares Silver Trust (SLV). Investors can also use an Exchange Traded Note (ETN), such as UBS E-TRACS CMCI TR Silver ETN (USV), as an alternative. However, it is important to note that ETNs are debt instruments, like bonds, that do not invest in any asset. Although linked to the performance of a market benchmark, ETNs are not equities or index funds; they combine the qualities of bonds and Exchange Traded Funds (ETFs).
If you want the most direct exposure to copper, you will use a type of Exchange Traded Note (ETN), such as iPath DJ-UBS Copper Total Return Sub-Index ETN (JJC).
If you want the most direct exposure to platinum, you will use a type of Exchange Traded Note (ETN), such as UBS E-TRACS Long Platinum Total Return ETN (PTM).
Investor Caution & Note: Precious Metals funds are specialty sectors that are not diversified and must be used in small amounts. For example, you may try limiting exposure to a percentage of 5% (but no more than 10%) of your total investment portfolio. Most mutual funds do not hold platinum as a physical asset. Investors can get indirect exposure to platinum in mutual funds by holding equity precious metals funds, such as Vanguard Precious Metals & Mining (VGPMX) and USAA Precious Metals & Minerals (USAGX) but these will typically have more exposure to gold and gold mining companies than platinum and platinum mining companies.
A commodity is a good or service without qualitative differentiation that supplies a basic consumer market demand. In different words, commodities can come in various forms or types but each commodity within a certain class or group is not fundamentally different than other commodities in that particular class or group.
For example, think of the commodity, sugar. It is an economic good that supplies a consumer market demand; it is a marketable good. However, to the consumer, there is no real qualitative difference from brand to brand: Sugar is sugar. Therefore the consumer will likely seek the lowest priced sugar, which often comes in the form of a generic brand. Other commodity goods include crude oil, coal, corn, tea, rice, gold, silver, and platinum.
An example of a service as a commodity is term life insurance. With other things being equal, such as the term in years and the relative soundness of the insurance company, consumers will generally seek the lowest price in the market. In different words, there are multiple insurance providers offering term life insurance and there is no qualitative difference between policies to the consumer and thus the "best choice" will normally be the one with the lowest price.
Investing in one commodity, especially in high quantities, is risky, to say the least. For a recent example, think of investing in gold in 2012, at a point of intense popularity. You couldn't read or tune into any form of mass media without seeing or hearing some advertisement to buy and invest in gold. Masses of people were attending gold parties, where they could sell their unused gold jewelry.
If you were unfortunate enough to buy into the gold hype, near its recent peak in October of 2012, it would only take 8 months to lose nearly 30% of its value. And this loss of nearly one-third in value was during a time that any of the best S&P 500 Index funds would have returned more than 20%. That's a missed opportunity cost of 50%! Ouch!
Natural resources are a broad reference to commodity-based industries such as energy, chemicals, minerals, and forest products in the U.S. or outside of the U.S. Mutual fund and ETF portfolios, also known as sector funds, will typically invest in a diverse selection of holdings in these areas to offer investors broad exposure to natural resources. Other portfolios may concentrate heavily or only in specific industries within the category of natural resources.
For broad exposure, investors are wise to consider funds that invest in a diverse index. For example, a good way to invest in U.S. natural resources is iShares North American Natural Resources ETF (IGE) and for international exposure, iShares S&P Global Materials ETF (MXI).
Vanguard and Fidelity also offer good index mutual funds, such as Vanguard Materials Index (VMIAX) and Fidelity Select Materials (FSDPX).
The energy sector consists of all the industries involved in producing and distributing energy, including oil companies, electric companies, wind and solar power, and the coal industry. Examples of energy corporations include include Exxon Mobil, Haliburton, and Southwestern Energy Company.
As you know now well by now from reading this article, when investing in sectors, it is wise to use an index fund or ETF to gain broad exposure to the various industries within the sector. There are several funds to choose from but one of the best energy sector index funds is Vanguard Energy Index (VENAX) and one of the best ETFs is Energy Select Sector SPDR (XLE).
The transportation sector consists of companies involved in the transportation of goods or people. General examples include railroads, trucking companies, and air carriers. Transportation stocks are sensitive to the energy sector, specifically to fuel prices. The sector can also be a leading economic indicator because it provides clues about the quantity and demand for goods being distributed by transportation companies to consumers. This idea is central to Dow Theory.
There are few mutual funds and ETFs that provide broad exposure to the transportation sector but one of the best mutual funds is Fidelity Select Transportation (FSRFX) and one of the best transportation ETFs is iShares Transportation Average (IYT).
Socially responsible investing (SRI)funds are not really categorized as an industrial sector but they are in a unique category of investing that is gaining in popularity. SRI is an alternative investment philosophy and strategy seeks to encourage responsible behaviors, including those supporting positive environmental practices, human rights, religious views or what is perceived to be moral activities (or to avoid what is perceived to be amoral by the SRI society, such as alcohol, tobacco, gambling, firearms, military relations, or pornography).
The SRI movement may trace its roots back to the 1700's when John Wesley founded Methodism (the Methodist Church) and specifically with his sermon "The Use of Money," which framed the do-no-harm to your neighbor through business practices aspects of social investing.
One of the best ways to access SRI investing is with mutual funds. SRI funds are also called socially conscious funds and typically avoid the "sin" products of alcohol and tobacco. Some prominent examples include Parnassus Workplace (PARWX) and Calvert Conservative Allocation (CCLAX).
According to Parnassus funds, here is the investment strategy for PARWX:
The Parnassus Workplace Fund is a diversified, fundamental, U.S., large-cap, core equity fund. The Fund invests principally in undervalued equity securities of large-capitalization companies with outstanding workplaces. Companies with good workplaces usually are able to recruit and retain better employees, and perform at a higher level than competitors in terms of innovation, productivity, customer loyalty and profitability. The Fund also takes environmental, social and governance factors into account in making investment decisions.
According to Calvert, here is the investment strategy for CCLAX:
The Fund is a "fund of funds." The Fund seeks to achieve its investment objective by investing in a portfolio of underlying Calvert fixed-income, equity and money market funds that meets the Fund's investment criteria, including financial, sustainability and social responsibility factors.
As a final word of caution on investing with sectors: Just be sure that you keep your total exposure to any one sector to small portions of your total allocation and use the funds for diversification, not for market timing. To invest wisely in sector funds or ETFs, you can follow my 5 percent rule of investment allocation, which advises against putting more than 5% of your investment portfolio into one particular stock or concentrated sector.
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.