What Is a Sector Fund?

A sector fund is a type of investment fund that focuses exclusively on businesses operating in a specific industry or sector of the economy. These funds are usually organized as mutual funds or exchange traded funds (ETFs).

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Sector funds concentrate on a specific part of the market, called a sector, by investing in companies that function within that sector. A sector refers to a particular line of business that offers the same or similar products. Examples of common sectors are the financial sector and the technology sector. JPMorgan operates in the financial sector, while Apple operates in the technology sector. Sector funds enable investors to make focused investments on the growth potential of a specific industry category.

Certain industries may present significant opportunities for growth as a result of economic factors that drive investment. However, investing in a particular industry carries a higher level of risk and volatility since it involves concentrated investments without economic diversification.

Sector funds provide diversification by holding multiple assets, but they also come with unique risks. If a sector underperforms, the fund focused on that sector will be negatively impacted without any balance from other sectors.

A sector fund must follow specific rules when selecting investment securities that align with the fund’s objectives. The fund manager cannot invest in sectors outside of the fund’s mandate. Investors will be informed if there are any changes to the fund’s strategy, especially if they are using the fund as part of a larger portfolio strategy.

Certain sectors and sector fund investing categories may need more careful research than others because some sectors are usually linked to market cycles. For instance, consumer cyclical stocks consist of companies engaged in automotive, housing, entertainment, and retail activities. These companies and market sub-sectors perform well during economic growth but struggle during economic downturns. On the other hand, consumer staples stocks, which include companies involved in home utilities, food, beverage, and household items, tend to remain stable regardless of market cycles.