Introduction to Sector-Fund Investing

Everyone knows you can start a fire using a magnifying glass: grade school kids routinely put this optics lesson to the test. This experiment teaches a valuable lesson: Focus is a powerful thing.

The power of focusing is the principle behind sector funds—mutual funds that invest in a specific industry. How powerful can sector investing be? At the end of 1999, nine of the 10 funds with the best 10-year returns were technology funds. Such stellar returns are often the reason investors flock to particular sectors, such as technology during 1999 or financials in the mid-1990s. More recently, at the end of 2023, materials, communication services and information technology funds led the charts with top-tier 5-year records.

In this lesson, we’ll discuss the variety of sector funds available, ways you might—or might not—use them in a portfolio, and what to look for when buying a sector fund.