What Makes These Funds Different

There are close to 500 sector funds today, up from roughly 150 just five years ago. Most sector funds fall into one of two groups: Either they reflect key industries such as technology, health care or financial services, or they offer a diversification play. Diversifiers include the utility, natural resources and real estate funds.

The stocks in these industries tend not to move closely in line with the broad stock market, either because they pay generous dividends and thus act like bonds or because they are rooted in hard assets. For example, natural resources funds are widely viewed as good diversifiers, because rising prices for oil and other commodities tend to raise prices of the stocks within them, even if stocks in other industries suffer.

The same can be said of real estate stocks, because those companies can benefit from rising rents and property values and thus could be in a position to do well if inflation heats up.

Many sector funds have generated good performance. For example, 20 of Fidelity’s 34 Select funds that have been around for at least five years beat the typical large-stock fund in total returns over that span, according to fund tracker Morningstar, as did 22 of 31 Select funds with 10-year records.