 Personal Finance PowerPoint Presentation Sector Fund Prepare to get financially fit by practicing personal finance. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Most of this information comes from Investopedia Sector Fund, which you can find online. Take a look at the references, resources, continue your research from there. This by James Chen, updated April 22, 2022 in prior presentations. We've been taking a look at investing goals, investing strategies and investing tools. Keeping in mind the two major categories of investments, that being the fixed income, typically the bonds and then the equities, typically the common stock. Also noting the tools we might be using such as mutual funds and ETFs, possibly helping us to diversify with less of an initial upfront investment as opposed to investing in individual stocks and individual bonds. Keeping that in mind, we're asking what is a Sector Fund? A Sector Fund is an investment fund that invests solely in businesses that operate in a particular industry or sector of the economy. Sector funds are commonly structured as mutual funds or exchange traded funds. So as individual investors, when we think about our investment strategies saving for something like retirement, we could buy individual stocks or bonds, or we might be putting our money into mutual funds or ETFs. Tools allowing us to pool money together with other investors so the fund manager can then allocate those funds in accordance with the structure of the fund. And we could then think of the strategy if we're looking at mutual funds and ETFs as to whether I want a minimal amount of funds, very few funds, possibly even one fund. That's broadly diversified covering my diversification requirement. Or do I want to have multiple mutual funds that are based on some kind of component so that I can have different weights that would be different than say just one mutual fund that's trying to be very broad and inclusive. So this would be one strategy. We've got a mutual fund that's going to be a little bit more refined down to a specific area. So once again, a sector fund is an investment fund that invests solely in businesses that operate in a particular industry or sector of the economy. Sector funds are commonly structured as mutual funds or exchange traded funds, those being the ETFs. We've talked about the differences between ETFs and mutual funds in prior presentation, so I'm not going to put most of my focus on that difference here. Understanding a sector fund. Sector funds focus on one area of the market known as a sector by investing in companies that operated in the funds chosen sector. A sector consists of one line of business that provides the same or similar products. So we're trying to group our holdings together or group basically the stock market, the different kinds of companies that are in it into different groups. This is one way we could do it by sector. Some common sectors include the financial sector or the technology sector. J.P. Morgan is in the financial sector while Apple is in the technology sector. Sector funds allow investors to take targeted bets on the appreciation potential of a particular industry category. So if you're an individual investor saving for save retirement, our overall strategy might be that I want a very wide broad diversified portfolio, which I might try to do with a few funds, maybe even one fund that has a standard kind of diversification. But then we might also say, hey, if I think a particular sector due to the current market conditions would be good to overweight myself in, have more and buy investments in that particular sector for whatever reason, like the financial sectors or technology sector, then maybe I invest in another mutual fund that's specific towards a specific sector allowing me to kind of put more weight on one area or another deviating a little bit from just the kind of standard diversification portfolio that might be a generic kind of allocation method. Certain sectors may offer higher growth potential due to economically driven investing catalysts. However, investing in a specific sector has a high risk potential and more volatility as it is concentrated investment with no economic diversification. So note that you have diversification within a sector, but if there's an economic condition and environment out there that is bad for the entire sector, although you don't have your money in one stock, it's still spread across stocks that are going to be impacted by the same kind of stuff. So you're going to have more volatility than if you were invested across a broader range of things. We always get down to this diversification concept that's kind of like the key component concept. So you're going to run into it a bunch of different times in a bunch of different ways, a bunch of different angles. It's one of those kind of things that you hear it so much that you kind of become numb to it and you turn off when you hear it. But you really kind of want to analyze it from multiple perspectives because that's going to be one of the key components to investing. Sector funds do offer the advantage of some diversification through multiple holdings in a portfolio, meaning you are in a mutual fund, which is going to have multiple investments in different companies, for example. However, overall sector funds will have idiosyncratic risk that affect the entire portfolio due to their targeted sector nature. In other words, if there's economic circumstances or conditions in the market that are going to impact that sector, then all those stocks are likely to go down. So although you have multiple stocks, they're likely to go down with the same kind of things because they're in the same sector. So if one sector performs poorly, the fund focused on that sector will do so as well without any offset from investments in a sector that is performing well. A sector fund will have portfolio constraints requiring the portfolio manager to choose investment securities for the fund that fall within the fund's targeted objective. So clearly when we choose this mutual fund, even if it's an actively managed fund, you can't really blame the manager, for example, if there's a dip in the market where all of that sector goes down, meaning if all technology goes down, there's nothing that the fund manager could have done to really stop that. They can mitigate the losses because they're restricted to investing in that particular area. That's the point of having that sector focus fund. So when you have a managed fund versus a passive fund or an index fund, the active manager you would think would be fair to say he needs to beat or she needs to beat the market for that particular area, the index for that area that they're investing in. So the investment manager will not be allowed to invest in any other sectors per the mandate of the firm. So if the strategy of the fund is to change, the investment manager has to notify the investors as they may be investing in the fund sector as part of a broader portfolio strategy. So that might be what you want, in other words, is this focused exposure, this focused nature, because that's what you're trying to fit into your broader portfolio. For example, possibly trying to weight yourself more in that sector for whatever reason. So some sectors and sector fund investing categories may require greater due diligence than others as certain sectors are typically associated with market cycles. Consumer cycle stocks, for example, include companies involved in automotive, housing, entertainment and retail activities. These companies and market subsectors do well when an economy is growing, but poorly when an economy is not. So clearly different sectors will have different pros and cons be strong or weak depending on different cycles in terms of the economy. So consumer staple stocks, including companies involved in home utilities, food, beverage and household items are known to be more stable through all types of market cycles. Sector funds in beta, generally one way to follow the risk and volatility of a sector is by following its beta from 2017 to 2020, the Standard and Poor's S&P Technology Sector Index reported one of the highest sector betas of 1.03 and the utility sector one of the lowest betas at 0.17. The technology sector reported a return of 50% in 2019, beating the S&P 500 indexes return of 31.5%. The return of the utility sector was 26.4% just below the indexes return as expected by its lower beta. Sector fund investing in specific sector funds is quite a simple process as there are many funds that actively or passively invest in different sectors of the market. So you can go to your investment platform, whatever your favorite platform is, like a Vanguard or something like that and you'll typically be able to find funds these days, which is great. There's a huge variety of funds which can be overwhelming, but the fact that we have the capacity to do that as individual investors so much more so than in the past is really, really nice. So an active sector fund would actively decide what shares should be in the portfolio based on their expert analysis. So we have that same kind of concept. Do you want an active manager which is going to cost more? The fund will have more expenses related to it. In other words, the active manager then having the capacity to choose funds within the restrictions of the fund within a particular sector then. And the idea would be that they need to beat the market, which would be like the index. How do we measure what the market is doing as a whole? Do we count every company in the market? No, not typically. We try to take a sample of it just like we would if we're trying to see the average height of basketball players or something. We're going to take a sample. We're not going to take all the basketball. I guess we could take all the basketball players because we probably know it. But all the people in a population, for example, would take a sample and then extrapolate it. That's kind of what the index is. We could then have a passive investment betting just on the index. So we want the mutual fund or ETF just tied to the index. That's cheaper than the active manager. So you want a question in terms of how good the active manager is. Do you want to pay for them to do what they do? Or do you think that they're not going to be able to beat the market and therefore invest in the passive or index fund? So they may include or remove companies from their portfolio often. So passive sector funds typically track on index and index. The S&P has numerous sector indexes for tracking which are the S&P 500 consumer discretionary index. We got the S&P 500 consumer staple index. These are kind of like the averages trying to measure different sectors. So now they're giving a sample of these different sectors. And so you might be able to get a mutual fund or ETF that kind of ties to these averages. So you got the S&P 500 energy, S&P 500 financials index, S&P 500 healthcare index, S&P 500 industrials index, S&P 500 information technology index, S&P 500 materials index, S&P 500 estate index, S&P 500 commercial services index, S&P 500 utilities index. So you might be saying something like depending on the current circumstance, you might have like one mutual fund that's going to have broad diversification and trying to invest in a wide variety of things. And from time to time you might be saying, hey, there's this massive health crisis. And I noticed Nancy Pelosi and all the senators are investing in healthcare all of a sudden. Maybe they know something. Not that I'm claiming anything. But maybe I want to be more weighted in the healthcare industry right now. So maybe you get on top of that, you try to put a little bit more weight in the healthcare industry or something like that, depending on your current circumstances. That's one way that you can kind of play this, take your overall weighting to be well diversified and then possibly from time to time try to put a little bit more weight on one area or the other. You might be saying, for example, technologies. Everybody ran, take technologies for a long point in time. Maybe they look really bloated at this point. At some point you would think that they can't just keep rising forever. It looks kind of like a bubble. Maybe you invest somewhere else from the technology or maybe you think the technologies are going to boom for whatever reason. So you don't want to have them as your only investment typically. But you might try to over weight or under weight skewing your overall percentage breakout by using some index funds that are more specialized, for example. It is usually advised to invest small portions of your investment allocation into sector funds due to their volatility and to incorporate sector fund investing as a larger part of your portfolio to add diversity. For example, an investor could follow a core satellite investment strategy whereby an investor chooses a core holding, whether a blue chip company or a diversified index. So possibly you have like a diversified index fund, mutual fund, that's broadly diversified that is allocated to a large portion of the investment capital. That's where most of your money might be then because it's more diversified and then chooses satellite investments such as sector fund which compromise a smaller allocation of investment giving you a little bit more weight to particular sectors in that way, for example.