How to Pick a Solid Sector Fund

A seven-point checklist for making money in a treacherous arena

Russel Kinnel 19 February, 2013 | 12:10PM

Investing in sector funds seems deceptively easy, but history has shown that investors usually make a mess of things. Many sector fund investors have lousy timing, and their choice of funds isn't all that great, either.

To understand why, it helps to begin by considering the motivations of fund companies in offering sector funds and of investors in buying them. All too often, the common denominator is greed rather than a convergence of long-term profit maximising by the two parties.

Sector Funds: It's All About Greed and Envy

On the one hand you have investors who read about all the good things going on in an industry. They see business is booming and long-term macro trends are supporting that growth. It looks like the trend could last a long time. At about the same time, stocks and funds focused on that industry are putting up big returns. This triggers envy because investors wish they had been there and greed because they figure they can get rich, too, by hopping on the bandwagon. In fact, the longer a trend goes on, the greater the inflows into a sector's funds becomes.

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About Author

Russel Kinnel  is Morningstar's director of fund research. He is also the editor of Morningstar FundInvestor, a monthly newsletter dedicated to helping US investors build winning portfolios.

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