This is a list of industrial sectors that provides some of the best funds and exchange-traded funds (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 sectors in terms of breadth, diversity, and below-average expense ratios.
This list includes consumer-driven and defensive industries spanning a multitude of sectors.
- Sector funds are index funds and ETFs that are focused on individual sectors, such as healthcare or technology.
- Investing in a sector fund is a way to gain broad exposure to a particular 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 category of stocks that contain technology-oriented businesses, such as manufacturers producing computer hardware, computer software, or electronics, and technology-oriented service industry companies, such as those providing information technology and business data processing. Examples of technology companies include Apple, Microsoft, and Google.
Technology investing is commonly associated with growth stock investing or with the aggressive growth investment objective.
Finding the best technology sector funds and ETFs can be difficult and misleading. For example, it is a common mistake to think of the Invesco QQQ ETF as a pure technology fund, because it tracks the NASDAQ 100 Index. It can be considered a pure growth investment strategy, but its holdings in technology only represent 48.21% of the portfolio.
Many technology sector funds focus on only one sub-sector of technology, such as computers, networking, semiconductors, or electronics. However, it is best for most investors to use a broadly diversified technology sector fund.
Financials Sector Funds
The financial services sector ("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 highest 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 Financials ETF (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.
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 and services when times are good, and less on them 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 on the automotive industry. However, most investors 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), and one of the best consumer cyclical ETFs is SPDR S&P Retail ETF (XRT).
Consumer Staples Sector Funds
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 an economic recession. Examples of consumer staples companies include General Mills, Inc (food), Philip-Morris, Inc (tobacco), and Coca-Cola (beverages).
Consumer staples stocks 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. Many investors will buy defensive stocks when they believe that a recession is likely to occur in the short term.
One 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 the Vanguard Consumer Staples Index Fund Admiral Shares (VCSAX), and among the best ETFs is Consumer Staples Select Sector SPDR (XLP).
Utilities Sector Funds
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.
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, utility funds are sector funds that invest in stocks of companies within the utility sector.
Utility 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. Many investors will buy defensive stocks when they believe that a 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 might 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 riskier. 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).
Utility 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 utility sector fund.
Health Care Sector Funds
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 areas 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, 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).
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, which 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 their doctor and buy their drugs, regardless of economic conditions.
Healthcare has also been at the center of political debate in recent history, because the costs and accessibility of healthcare are passionate and personal topics for voters. Legislation can positively or negatively impact some sub-sectors of healthcare. Expiring drug patents for widely used pharmaceuticals can negatively impact a drug manufacturer, or, conversely, an FDA approval of a breakthrough drug can have a positive impact. One 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 healthcare sector was minimal.
Precious Metals Sector Funds
Most mutual funds in the precious metals category invest primarily in mining company stocks. However, some 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 ETFs.
Investors can also use exchange-traded notes (ETNs). It is important to note that ETNs are debt instruments, like bonds, that do not invest in any asset. Although they are 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 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 the 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 the Sprott Gold Equity Fund (SGDLX) and the Gabelli Gold Fund, Inc. Class A (GLDAX).
If you want the most direct exposure to silver, you would use a silver ETF, such as iShares Silver Trust (SLV). Investors could also use an ETN, such as iPath Silver ETN (SBUG), 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 ETFs.
If you want the most direct exposure to copper, you would use a type of ETN, such as the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC).
If you want the most direct exposure to platinum, you would use a type of ETN, such as the iPath Bloomberg Platinum Subindex Total Return ETN (PGMFF)
Precious metals funds are specialty sectors that are not diversified and must be used in small amounts. For example, you might try limiting exposure to 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 the Vanguard Global Capital Cycles Fund (VGPMX) and the USAA Precious Metals & Minerals Fund (USAGX), but those will typically 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 or service, without qualitative differentiation, that supplies a basic consumer market demand. In other words, commodities can come in various forms or types, but each commodity within a certain class or group is not fundamentally different from other commodities in that particular class or group.
For example, think of 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.
One 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. There are multiple insurance providers offering term life insurance, and to the consumer there is no qualitative difference among policies, 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. As a hypothetical example, think of investing in gold during a time of intense popularity. You couldn't read or tune into any form of mass media without seeing or hearing some advertisements to buy and invest in gold. Masses of people were attending gold parties, where they could sell their unused gold jewelry.
What if you were unfortunate enough to buy into the gold hype near its peak, and it only took eight months to lose nearly 30% of its value? And what if a loss of nearly one-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 opportunity cost of 50%!
Natural Resources Sector Funds
"Natural resources," in the context of stocks, is a broad reference to commodity-based industries such as energy, chemicals, minerals, and forest products. 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 would be wise to consider funds that invest in a diverse index. For example, one good way to invest in U.S. natural resources is through iShares North American Natural Resources ETF (IGE), and for international exposure, iShares Global Materials ETF (MXI).
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 of 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 Exxon Mobil, Haliburton, and Southwestern Energy Company.
As you know well by now from reading this article, when investing in a sector, it is prudent to use an index fund or ETF to gain broad exposure to the various industries within that sector. There are several funds to choose from, but one of the best energy sector index funds is Vanguard Energy Index Fund Admiral Shares (VENAX), and one of the best ETFs in this space is the Energy Select Sector SPDR Fund (XLE).
Transportation Sector Funds
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 state of the energy sector, specifically to fuel prices. This sector can also be a leading economic indicator, because it provides clues about the quantity and the 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. One of the best mutual funds is Fidelity Select Transportation Portfolio (FSRFX), and 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 are in a unique category of investing that is gaining in popularity. SRI is an alternative investment philosophy and strategy that 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 may be perceived as amoral, such as alcohol, tobacco, gambling, firearms, or pornography).
The SRI movement may trace its roots back to the 1700s, when John Wesley founded Methodism (the Methodist Church), and specifically to his sermon "The Use of Money," which counseled doing no harm to one's neighbor through business practices.
Relatedly, "environmental, social, and governance" (ESG) funds are also gaining in popularity among investors. Closely related to SRI, ESG funds specifically look to add investments that fit environmental criteria that consider how a company performs as a steward of nature; social criteria examining how it manages relationships with employees, suppliers, customers, and the communities where it operates; and corporate governance matters involving 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" and typically avoid the "sin" products of alcohol and tobacco. Some prominent examples include Parnassus Endeavor Fund Investor Shares (PARWX) and Calvert Conservative Allocation (CCLAX).
For example, 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.
Investing Wisely in Sector Funds
Be sure that you keep your total exposure to any single 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 the 5% rule of investment allocation, which advises against putting more than 5% of your investment portfolio into one particular stock or concentrated sector.
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.