This list of industrial sectors provides some of the best funds and exchange-traded funds (ETFs) within each industry. Most of the funds listed are index funds and ETFs. These fund types often provide the best exposure to the sectors in terms of breadth, diversity, and expense ratios.
The list includes consumer-driven and defensive industries spanning many sectors.
- Sector funds are index funds and ETFs that are focused on certain sectors, such as healthcare.
- Investing in a sector fund is a way to gain broad exposure to a sector with one investment.
- Sector fund investing is a way to diversify your portfolio, but it should not be used for market timing.
Technology Sector Funds
The technology sector is a group of stocks of technology-oriented businesses. These can include producers of computer hardware, software, or electronics as well as service industry companies, such as those providing tech and data processing. This sector includes Apple, Microsoft, and Google.
Technology investing is linked with growth stock investing or the growth investment objective.
Finding the best funds and ETFs in this sector can be tricky. You might think of the Invesco QQQ ETF as a pure technology fund, because it tracks the NASDAQ 100 Index. It can be thought of as a pure growth option, but its holdings in tech are only 48.21%.
Many of these sector funds focus on only one subsector, such as computers, but it's often best to use a broadly diversified technology sector fund.
Financials Sector Funds
The financial services sector consists of banks, credit card companies, insurers, and brokerage firms, such as Bank of America, Wells Fargo, Goldman Sachs, and MetLife. Some financial stocks do best in times of low interest rates. Services such as mortgages, loans, and investments are in highest demand during those times.
More than 100 mutual funds and ETFs specialize in financials. One of the best is Vanguard Financials Index (VFAIX). One of the best ETFs is iShares' US Financials ETF (IYF).
Consumer Cyclicals Sector Funds
Consumer cyclical goods or services are those that aren't necessary. They're also called "leisure" or "discretionary" goods and services. Purchase of these goods depends upon economic cycles.
Retail sales of leisure goods or services are further grouped as durable or non-durable. Autos and hardware are durables. Entertainment and hotels are non-durables. Stocks in this sector are often higher during times of economic growth than in times of recession. Only the primary staples goods might remain in demand during those times.
Consumers spend more on non-necessary items and services when times are good. They spend less on them when times are tough.
As with most sector funds, this one has many subsectors. You can buy shares of a cyclical stock sector fund that concentrates only on the auto industry, but you would be wise to get broader exposure to sectors by choosing the diversity of index funds and ETFs.
One of the best consumer cyclical sector index funds is the Vanguard Consumer Discretionary Index Fund Admiral Shares (VCDAX). One of the best ETFs is SPDR S&P Retail ETF (XRT).
Consumer Staples Sector Funds
Consumer staples are products such as food, tobacco, and beverages that are thought to be essential for daily living. Stocks of companies that produce these products are said to be "defensive" or "non-cyclical" stocks. This sector includes General Mills (food), Philip Morris (tobacco), and Coca Cola (beverages).
People aren't willing to stop buying and consuming staples, even during a recession.
The prices of staples stocks tend to remain more stable in a down market, compared to growth stocks. People still need cereal and milk during a recession. They may even increase consumption of so-called sin products, such as cigarettes and alcohol. Many will buy defensive stocks when they think that a recession is about to occur.
One good way to get broad exposure to the staples sector is with the diversity and low expenses of an index fund or ETF. One of the best consumer staples index funds is the Vanguard Consumer Staples Index Fund Admiral Shares (VCSAX). The Consumer Staples Select Sector SPDR (XLP) is among the best ETFs.
Utilities Sector Funds
According to Morningstar, "Utilities fund portfolios seek capital appreciation by investing mostly in equity securities of U.S. or non-U.S. public utilities including electric, gas, and telephone service providers." These are sector funds that invest in stocks within the utility sector.
These stocks are also thought to be defensive. Their prices tend to remain more stable in down markets than other stocks do. People still need services such as phone, gas, and electricity during a recession. Many investors will buy defensive stocks when they think a recession is about to occur.
You might think about a mutual fund like Fidelity Telecom and Utilities (FIUIX) if you want concentrated exposure to phone companies such as Verizon and Comcast, but sector funds are already very focused. Subsectors can be too narrow, which makes them risky. It's wise to take advantage of the diversity and low expenses of an index fund or ETF, such as Utilities Select Sector SPDR (XLU).
Utility stocks are also known for paying dividends. You might think about adding one of these funds if you're looking to add dividend mutual funds to your income.
Healthcare Sector Funds
Healthcare is also known as "health" or "specialty health." It's a stock-investing sector that focuses on this industry, and it's quite broad. Even a person with no background in investing can think of some areas of the healthcare industry, such as hospital conglomerates and drug manufacturers. This sector includes Pfizer, United HealthCare, Cigna, Abbott Laboratories, and HCA Holdings.
One good way to gain broad exposure to the healthcare industry is through the use of a health sector mutual fund, such as Vanguard Health Care Fund Investor Shares (VGHCX).
You can use health sector funds as a tool to diversify a larger portfolio of mutual funds. These are often thought to be defensive stocks. They have a low correlation to broad stock index funds. Many investors use broad stock index funds as core holdings in a portfolio.
The healthcare industry can still perform well when many other areas are doing poorly. People must still see their doctors, and they must still buy their medications, regardless of the economy.
New laws can impact some subsectors of healthcare for better or worse. Expiring drug patents for widely used pharmaceuticals can negatively impact a drug manufacturer. An FDA approval of a breakthrough drug can have a positive effect.
Some stocks have advanced under the Affordable Care Act, such as hospital corporations. Others have declined, such as insurers, but the net effect on the broad healthcare sector has been minor.
Precious Metals Sector Funds
Most mutual funds in the precious metals category invest in mining company stocks, but some own small amounts of gold, silver, copper, or platinum, often in the form of bullion coins. Precious metals companies are often based in North America, Australia, or South Africa.
Some investors prefer to buy bullion coins. Others prefer to buy shares of mining company stocks or mutual funds, ETFs, and ETNs.
Commodities' precious metals portfolios invest in metals such as gold, silver, copper, platinum, and palladium. Investment can be made directly in physical assets or commodity-linked derivatives. Many gain the most exposure to precious metals through a subcategory of commodity-precious metals ETFs.
You can also use exchange-traded notes (ETNs), which are debt instruments, like bonds, that do not invest in any asset. They're linked to a market benchmark, but they 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 ETF, such as the SPDR Gold Shares (GLD). Mutual funds invest little to no capital in physical gold. Often grouped as "precious metals," gold mutual funds often hold the stocks of mining companies.
The Sprott Gold Equity Fund (SGDLX) and the Gabelli Gold Fund, Inc. Class A (GLDAX) are two of the best gold mutual funds in terms of long-term performance. They also offer long manager tenure and average-to-low expense ratios.
You would use a silver ETF, such as iShares Silver Trust (SLV), if you want the most direct exposure to silver. You could also use an ETN, such as iPath Silver ETN (SBUG). Keep in mind that ETNs are debt instruments, like bonds. They do not invest in any asset. They're linked to a market benchmark, but ETNs are not equities or index funds. They combine the qualities of bonds and ETFs.
You would use an ETN such as the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC) if you want the most direct exposure to copper. You would use a type of ETN, such as the iPath Bloomberg Platinum Subindex Total Return ETN (PGMFF), if you want the most direct exposure to platinum.
These funds are specialty sectors that are not diversified. They must be used in small amounts. You might try limiting exposure to 5% (but no more than 10%) of your total portfolio.
Most mutual funds don't hold platinum as a physical asset. You can get indirect exposure to platinum by holding equity precious metals funds, such as the Vanguard Global Capital Cycles Fund (VGPMX) and the USAA Precious Metals & Minerals Fund (USAGX), but they will often have more exposure to gold and gold mining companies than to platinum and platinum mining companies.
Commodities Sector Mutual Funds
A commodity is a good that supplies a basic consumer market demand. Think of sugar. It's a marketable good that supplies a consumer market demand, but there's no real difference from brand to brand: Sugar is sugar. A consumer will often seek the lowest-priced product, which often comes in the form of a generic brand. Other commodity goods include crude oil, coal, corn, tea, rice, gold, silver, and platinum.
Term life insurance is a service commodity. People will often seek the lowest price in the market. Multiple providers offer term life insurance. There's no real difference among policies. The "best choice" will often be the one with the lowest price.
Investing in one commodity, especially in high quantities, is risky. Think of investing in gold during a time of intense popularity. You couldn't read any form of mass media without seeing some ads to buy and invest in gold.
What if you bought into the gold hype near its peak, and it only took eight months to lose nearly 30% of its value? What if a loss of nearly a third in value occurred during a time when any of the best S&P 500 index funds would have returned more than 20%? That's a missed chance that will cost you 50%.
Natural Resources Sector Funds
"Natural resources" refers to commodity-based industries such as chemicals, minerals, and forest products. Mutual fund and ETF portfolios, also known as "sector funds," will often invest in holdings in these areas to offer broad exposure to natural resources.
Other portfolios may focus largely or only on certain industries within the category of natural resources.
You would be wise to look into funds that invest in a diverse index for broad exposure. One good way to do that is to invest in U.S. natural resources through iShares North American Natural Resources ETF (IGE). iShares Global Materials ETF (MXI) is good for international exposure.
Vanguard and Fidelity also offer good index mutual funds, such as Vanguard Materials Index Fund Admiral Shares (VMIAX) and Fidelity Select Materials (FSDPX).
Energy Sector Funds
The energy sector consists of all the industries that are involved in producing and distributing energy. They include oil and electric companies, wind and solar power, and the coal industry. Exxon Mobil, Haliburton, and Southwestern Energy Company fall into this sector.
Use an index fund or ETF to gain broad exposure to the various industries within that sector. There are many funds to choose from. One of the best is Vanguard Energy Index Fund Admiral Shares (VENAX). One of the best ETFs in this space is the Energy Select Sector SPDR Fund (XLE).
Transportation Sector Funds
This sector is made up of companies involved in the transportation of goods or people. It includes railroads, trucking companies, and air carriers. These stocks are sensitive to the state of the energy sector and to fuel prices. This sector can also be a leading economic indicator. It provides clues about the quantity and demand for goods being distributed by these companies to consumers.
Few mutual funds and ETFs provide broad exposure to this sector. One of the best mutual funds for this sector is Fidelity Select Transportation Portfolio (FSRFX). One of the best transportation ETFs is iShares Transportation Average (IYT).
Socially Responsible Investing (SRI) Funds
Socially responsible investing (SRI) funds are not categorized as an industrial sector, but they're in a unique category of investing that's gaining in popularity.
SRI is an alternative strategy that seeks to encourage responsible behaviors. These might include positive environmental practices, human rights, religious views, or moral activities that avoid alcohol, tobacco, gambling, firearms, or pornography.
Environmental, social, and governance (ESG) funds are also gaining in popularity. They're related to SRI. These funds look to add investments that fit environmental criteria that consider how a company performs as a steward of nature. Companies that fit social criteria are conscientious of how they manage relationships with employees, suppliers, customers, and communities.
Corporate governance matters involve a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
One of the best ways to access SRI investing is with mutual funds. SRI funds are also called "socially conscious funds." They often avoid companies that manufacture the "sin" products, such as alcohol and tobacco. These funds include Parnassus Endeavor Fund Investor Shares (PARWX) and Calvert Conservative Allocation (CCLAX).
Investing Wisely in Sector Funds
Keep your total exposure to any single sector to small portions of your total allocation. Use the funds for diversification, not for market timing. You can follow the 5% rule of allocation to invest wisely in sector funds or ETFs. This rule advises against putting more than 5% of your investment portfolio into one stock or concentrated sector.
Frequently Asked Questions (FAQs)
What are sector funds?
Sector funds combine the passive diversification of an ETF with more targeted investment strategies. The funds contain dozens (or hundreds) of stocks that all operate in a similar industry. For example, rather than buying stock in a single bank like JP Morgan, you might instead buy a financial sector ETF that contains JP Morgan, Bank of America, and hundreds of other banking companies.
What is the investment objective of using a sector fund?
Sector funds allow you to tweak your portfolio exposure. For example, you may have the majority of your investments in broad market index funds like the S&P 500. If you believe that a certain sector of the S&P 500 will outperform (or underperform) the market average, then you can buy (or short) the ETFs that track that sector.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.