Using Sector Funds to Construct Diversified Mutual Fund Portfolios
‘Sector funds are too risky.’ ‘I doubled my money with Fidelity Select Technology in 12 months!’ ‘Avoid sector funds.’ If all of this sounds confusing, you are not alone. Sector funds are among the more misused and misunderstood investments. So, how should you use sector funds?Before looking at one of the uses of sector funds in detail, let’s review what sector funds really are: Sector funds confine their investments to a particular sector of the economy. Fidelity Select Healthcare (NDQ: FSPHX) is an example of a sector fund. By focusing on stocks of companies in the healthcare sector, the price moves of this fund are more dependent on factors that impact the healthcare sector rather than the economy as a whole. Demographic change, such as increasing age of the population, is an example of a factor that particularly drives investments in healthcare. By diversifying its assets across over 60 companies within the healthcare sector, Fidelity Select Healthcare provides investors with the opportunity to benefit from secular trends driving the demand for healthcare while mitigating company-specific risks such as failure of clinical trials conducted by a particular company.Let’s now look at a high-potential approach of using sector funds.Using sector funds to create a diversified mutual fund portfolio By allocating assets across a group of sector funds, investors can effectively create a diversified mutual fund portfolio using sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes such as the S&P 500®.To implement this active approach to money management, it helps to have a diverse group of sector funds to choose from. Fidelity Investments manages 41 sector funds under the Fidelity Select Portfolios® umbrella which makes this family of sector funds well-suited for this purpose. By dividing assets across, say, 8 sector funds in the Fidelity Select Portfolios, e.g., Fidelity Select Biotechnology (NDQ: FBIOX), Fidelity Select Computers (NDQ: FDCPX), Fidelity Select Energy Service (NDQ: FSESX), Fidelity Select Home Finance (NDQ: FSVLX), Fidelity Select Medical Delivery (NDQ: FSHCX), Fidelity Select Multimedia (NDQ: FBMPX), Fidelity Select Retailing (NDQ: FSRPX), and Fidelity Select Wireless (NDQ: FWRLX), one can build a customized diversified portfolio. With each of the sector fund managers actively scouting for the best investment ideas within their sectors, this cluster of Fidelity Select Portfolios packs a lot of power into your diversified portfolio.Other mutual fund families that provide a relatively wide choice of sector funds include ProFunds and Rydex Funds. Exchange traded sector funds such as Select Sector SPDRs, iShares, and Sector HOLDRS, that trade on the American Stock Exchange, can also be used to construct diversified sector fund portfolios.The wide selection of sector funds available provides you with the ability to take advantage of changing market conditions and continually optimize the risk-reward characteristics of your diversified portfolio. To employ this approach effectively, you need to understand and follow the dynamics of the individual sectors. You must also be able to make informed decisions on sectors to select and sectors to avoid. At the end of the day, you should be right more often than wrong with the sectors you select. AlphaProfit.com’s research suggests that by constructing diversified mutual fund portfolios using sector funds, investors have the potential to outperform the market averages on the basis of relative returns as well as risk-adjusted returns. The track-record of AlphaProfit’s model portfolios indicates the potential of this approach. A CaveatDiversification is one of the cornerstone principles of mutual fund investing. Sector funds that focus on high-growth sectors or narrow niches of the economy tend to be volatile. It is generally not advisable to commit a substantial portion of your total assets to a single sector fund. Maintaining adequate diversification across sectors in your overall mutual fund portfolio is good investing practice. Key Points to Remember1. Sector funds are investment vehicles that focus their investments on a particular sector or industry group. Sector funds provide investors with an opportunity to profit from trends impacting a particular sector or industry while reducing company-specific risks.2. High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This active investment approach requires investors to make informed decisions on sector selection. The power-packed cluster of sector funds may offer investors the potential to outperform the market averages.3. Diversifying mutual fund portfolios across sectors is good investing practice.Notes: This report is for information purposes only. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice. This report does not have regard to the specific investment objectives, financial situation, and particular needs of any specific person who may receive this report. The information contained in this report is obtained from various sources believed to be accurate and is provided without warranties of any kind. AlphaProfit Investments, LLC does not represent that this information, including any third party information, is accurate or complete and it should not be relied upon as such. AlphaProfit Investments, LLC is not responsible for any errors or omissions herein. AlphaProfit Investments, LLC disclaims any liability for any direct or incidental loss incurred by applying any of the information in this report. The third-party trademarks or service marks appearing within this report are the property of their respective owners. All other trademarks appearing herein are the property of AlphaProfit Investments, LLC. Past performance is neither an indication of nor a guarantee for future results. No part of this document may be reproduced in any manner without written permission of AlphaProfit Investments, LLC. Copyright © 2004 AlphaProfit Investments, LLC. All rights reserved.
About The Author
Sam Subramanian, PhD, MBA is Managing Principal of AlphaProfit Investments, LLC. Sam developed the ValuM™ Investment Process for managing investments. He edits the AlphaProfit Sector Investors&#’; Newsletter™. For the 5 year period ending December 31, 2003, AlphaProfit model portfolios increased by up to 288%, a compound annual return rate of 31%. To learn more about AlphaProfit and to subscribe to the FREE newsletter, visit: http://www.alphaprofit.com
Previous Articles Highlighter:
Useful Tips On Buying A New Or Used Car By John Mussi (1)
A UK Home Owner Loan is great if you want to raise a large amount; are having problems getting an unsecured loan; or have a poor credit history. Many lenders look more favourably on people who are home owners as this demonstrates a commitment to repay a large amount of money over a long period.
Why Your Mutual Fund Doesn’t Return As Much As You Think (2)
Or the types of stocks the fund buys now may differ from the ones it set out to buy when you originally invested.Significant tax hits. In addition to the capital gains taxes you pay when your fund manager actively trades stocks, you also face "embedded capital gains." These can occur when a fund you recently bought sells a stock it has held for many years.
Why Mobile SMSText Messaging (3)
3. B2B ApplicationsCustomized mobile applications conforming to a business rule and addressing a specific target audience. Example: MIS reports to mobile sales force, critical data to mobile technical work force.
Better Decisions Balancing Efficiency BuyIn (4)
Autonomous You have sufficient expertise and information You have private information that cant be shared Time is very short You have made up your mind and wont be moved The problem is trivialConsultation It is within one persons area to implement The problem is of intermediate importance You want to avoid major errors The team is not (yet) working wellConsensus The problem is important and complex No one is the expert; members together have the expertise A high quality solution is neededDelegation There is one clear expert The problem is not that important It would be a developmental task You and the team can live with the solutionThe purpose of this decision model is to give you a language and framework that you can use to be clear with your team about how a decision is being made.
A Mass Customization Revolution (5)
A process that, if not adhered to, could cost the business owner market share, and ultimately his market completely. Most of us have known someone that this has happened to in the past.
Why PR Is An Engine For Economic Growth (6)
The moment has come when you must create a compelling message carefully constructed to alter your key target audience’s perception, as specified by your public relations goal. Keep in mind that you can always combine your corrective message with another news announcement or presentation which may give it more credibility by downplaying the apparent need for such a correction.
Step Back To Succeed In Decision Making (7)
They felt pressured to come up with the ‘right’ answer. In many cases the perceived right answer is not always the correct one. If your instinct is telling you something is not right – listen to it, ask it questions, that’s what it is there for.
How To Negotiate A Settlement With An Insurance Claims Adjuster By Dan Baldyga (8)
I'd like to discuss them in detail with my doctor“. Pause and then add, “We'll call this off for now while I go back and consult with him."Before he answers you should get up, smile, point towards the kitchen door and bid him "Goodbye".
Something New For Managers (9)
Always be careful that your chosen strategy flows naturally from your public relations goal. Now, what will you say to members of that key target audience that, hopefully, will alter the inaccurate perception you discovered?
7 Work At Home Mistakes To Avoid (10)
When I first started my own "WORK AT HOME" business, I had no experience whatsoever , and I did not know how to get started on the right foot. After a lot of trial and error, I have learned [and still learning] on what to do and not to do to get started in my "WORK AT HOME " business.
Three Proven Steps To Improve Your Home Business Advertising Response In Just 1 (11)
In the usual types of Newspaper Directory ads you're dealing with very targeted prospects. These are people looking up your company type and ready to call you. That's the beauty and the curse of Newspaper Directory ads.
This Is The Power Of PR (12)
Kelly © 2004. Bob Kelly counsels, writes and speaks to business, non-profit and association managers about using the fundamental premise of public relations to achieve their operating objectives. He has been DPR, Pepsi-Cola Co.; AGM-PR, Texaco Inc.; VP-PR, Olin Corp.; VP-PR, Newport News Shipbuilding & Drydock Co.; director of communi- cations, U.S.
Working As A Knowledge Worker In The Information Age (13)
The old adages: "It's not what you know, but who you know" and "High Tech, High Touch" could be the mottos of knowledge workers in the 21st Century.Never before in the history of the world has both networking and interpersonal communication been potentially easier, broader, more wide-spread and paradoxically, more difficult.The access to people and information in the information age is without parallel in history.
Networking 1 (14)
Many of these individuals are using it, so rather than a phone call you can e-mail one another.Copyright DeFiore Enterprises 2000Interested in having your own successful, home based creative real estate investing business?
The 6 Stages Of Modern Career Development (15)
Her coaching practice is Brightlight Coaching, she helps people come up with bright ideas for their life and empowers them to freely shine their bright light to the world. Contact her for a free 30 minute coaching session: www.getsmartseries.com and www.brightlightcoach.comcoach@getsmartseries.com
Ten Effective Ways To Reduce Your Business Costs (16)
Wholesale/Bulk You'll save money buying your business supplies in bulk quantities. You could get a membership at a wholesale warehouse or buy them through a mail order wholesaler. Buy the supplies you are always running out of.4.
Achieve More In 2 (17)
This will prepare you for them and help you overcome the obstacles easier and with less stress. In fact, the simple act of planning for obstacles will often prevent many of them from occurring.
Time Out (18)
Hinting a time out for interest rates unnerved investors.Interest rate moves have subtle effects on income for many. Our family benefits from the presence of our children's great grandmother, who begins her 91st year, likes football ("Oh, that poor Drew Bledsoe."), but dislikes current interest rates.
Common Mistakes Motorcycle Buyers Make When Looking For A Motorcycle Loan By Jay Fran (19)
If the loan is an installment loan, does it use rule of 78 or simple interest? (Simple interest is always better because it does not penalize the motorcycle buyer if the loan is paid off early.) What is the down payment requirement to get the motorcycle loan?
Surviving The Workday In Your Organization (20)
Most people suffer from stress at some time during the day. When you recognise your own peak and low energy levels, you can work with your body clock to maintain high productivity and alertness.
Newer Articles Highlighter:
What Is Road Hazard Warranty? Do You Really Need It? By Gene Grant (1)
Some Road Hazrd packages provide a nationwide coverage, which are great for people who are traveling, or vacationing, because you now have peace of mind knowing that you are protected while away from your local area.
To Grow Out Of Unemployment (2)
Others cannot be retrained and they join the ranks of the long term unemployed, swelling structural unemployment. Changes in Consumer Preferences – Fashions change, mass consumption patterns alter, emphases on certain goods and services shift.
How To Take Your Stalled Projects To The Finish Line (3)
Some will fade away on their own; others will ripen into exciting opportunities.(7) Create a strong support system, even if you have to hire a consultant or coach. As Julia Cameron wrote in The Artist’s Way, the notion of solitary creativity is nothing but a stereotype.
Temp Gretta And The Great Seattle Race (4)
Her hands bandaged from paper cuts, her back just barely healed from heavy lifting, Gretta was determined to have that job if it was the last thing she ever did!
The Rules Of The Road By Kevin Schappell (5)
This can help avoid an accident or at the least make someone's day a little brighter. Be aware of large trucks and their driving styles. Tractor trailers, dump trucks, and other large vehicles can not stop as fast as you can.
Social Engineering The Real ETerrorism (6)
Make sure that all staff, especially non-IT staff, are aware of the risk of social engineering and what to do in the event of such an attack. Conduct regular security awareness training so that all staff are kept up to date with security related issues.
Who Is Running Your Business (7)
Gerry conducts a range of keynote speeches from thirty minutes to full-day education workshops.Weekly telecommunication classes and monthly education workshops are the cornerstones of developing strong referrals and prospects in this learning environment.
Can You Really Improve Your Organisation Skills (8)
Of course the next thing you have to do is take action! Then you too can experience the benefits of being organised such as having more time to do what you want to, improved confidence, having more control over your life, reducing your stress and feeling good!It's all up to you.Lorraine Pirihi is Australia's Personal Productivity Specialist and Leading Life Coach.
Want To Loosen Uncle Sam’s Grip On Your Wallet (9)
Generally, the money you contribute to your plan is taken out before taxes, so your taxable income, and thus your tax bill, is lower.If you're eligible to make deductible contributions to a traditional IRA, the same principle is at work.
Why Choose A Bad Credit Personal Loan (10)
So if you've been turned down for credit elsewhere don't despair.If you are a UK home owner with equity in your property, a UK Bad Credit Personal Loan can bring that normality back to your life.
The 21st Century Way To Build Equity (11)
of the on-line resource the Mortgage Manager Hi-Tech Mortgage Payment Service. To obtain an application to apply for the biweekly payment service at no cost visit http://www.eMortgageManager.net. A password-protected mortgage-auditing program is also included at no cost to the consumer after 6 months of using the service.
How Your Auto Insurance Rates Are Determined By A. Chris Tijerina (12)
Your claims history will affect you for a minimum of 3 years. If you have filed a claimed or if you even mentioned a claim to your insurance company it can and most likely will affect your rates.
Characteristics Of High Performance Teams (13)
Traut is the president of Entelechy, Inc., a company that helps organizations unlock the potential of their people through customized training programs in the areas of sales, management, customer service, and training.
What You Must Know When Marketing Your Business (14)
Target market Staff involvement Most effective strategies for marketing and selling your services/product What is your plan of action? Are you committed to your success?WHEN YOU MAY NEED TO CONSIDER HIRING A BUSINESS COACH When it is difficult to stay committed consider hiring a business coach.
Yesterday’s Project Manager Is Today’s Project Engineer (15)
Younger engineers are stuck with older/outdated titles but their responsibilities are growing and they are expected to do more and produce more. Younger engineers do the bulk of work and when it comes to the face value with clients and the company's brass, they are getting almost nothing.
Become A Customer EnthusiasmGuru (16)
Ask your customers (either through a survey, an e-mail request or by a phone call) how you can continue to serve them -- even better. Then follow-through. When you follow-through and develop ways to serve your customers better based on their input they will be enthusiastic supporters of you and your company!
How To Walk The Floor And Talk To Customers (17)
Feed Back The Ideas Make sure you feed back comments to your team. Remember, praise in public, reprimand in private. Your team will be interested in your comment.
Negotiating Rates With Your Credit Card Company (18)
The company needs your business in order to be successful and with clients they lose big time. Therefore, you should always display this “take them or leave them attitude” while conducting your negotiations.
What Is Optimum Performance (19)
It didn't really matter how 'good' you were. The 'how good' was secondary to just having fun. It was the times you chose to do what you wanted that was the most fun and exhilarating.
How To Turn Business Losses Into Cash Flow (20)
It would not be appropriate for a taxation officer to advise the business owner on how to manage their taxation affairs, and there is a case of the Privy Council (UK) that confirms the Inland Revenue cannot tell a business owner how to run their business.
Permalink to Using Sector Funds to Construct Diversified Mutual Fund Portfolios