But are sector funds right for your portfolio?



Sector funds are a fairly simple concept. They're a collection of stocks in a specific industry or sector. Whether they are exchange-traded sector-funds or mutual funds, sector funds come in a variety of choices. Standard and Poor's splits up the U.S. stock market into 10 separate areas. They are: consumer discretionary, staples, health care, utilities, industrials, energy, materials, telecommunications, information technology, and financials.

Each sector has its advantages and disadvantages, the impact of which will vary depending on your personal situation.

Because sector funds are able to focus on specific investment opportunities, accentuated returns both on the upside and downside are possible. This provides yet another example of why diversification across different asset classes in an attempt to reduce overall volatility and risk is so important. Unfortunately, diversification does not protect against or prevent losses from occurring in down market cycle.

Choosing when to invest is also just as important in sector funds as it is with other investments. When you choose to enter into a particular sector can make a huge difference on how much you gain or lose. Making sure you utilize the advice of a financial professional is an important step to take when deciding whether or not to invest in sector funds, or choosing a specific sector fund. They can be a difficult investment to time correctly and they aren't generally recommended as a short term tool without some sort of professional assistance.

But which sectors have been doing the best? And which are doing the worst? Well, the answers are fairly obvious. According to Morningstar, the best sector in the last five years is, of course, energy. And what about the worst performing sector in the last five years? You guessed it, technology. Of course, past performance does not guarantee future returns.

One important question to ask is: What sectors will do well in the coming months and years? And that is where opinions may differ. Some experts believe energy will continue to do well, while others point towards emerging markets as a sign of future growth. Countries like China, Brazil, India and Russia, are all starting to benefit from a developing middle-class.

Others still, believe that the financial services sector will do well in the near-future. No matter what sector the experts believe will do well, sector funds may offer an added tool to help you achieve your financial goals.

Sector funds speak to the investment needs of a very select group of investors and are a unique tool. But different needs and objectives mean a different style and it's best to consult a financial professional along the way. With the unique ability of sector funds to focus on a specific industry or group, they may be an added investment tool at your disposal. And in the end, you may just find yourself in the zone.