Understanding Sector Funds

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Non-Diversified Risk Funds

[Staff Writers]

Although less than 10% of the total number of mutual funds are considered true sector funds, year after year, 40% or more of the top-performing funds have been sector funds. For physician-investors sold on a buy-and-hold strategy, sector funds may not be their cup of tea. Yet, sector funds offer an opportunity to outperform the market indices, possibly even substantially.


According to the financial and economic Dictionaries of DE Marcinko, HR Hetico and elsewhere, a sector fund may be defined as:

An open-ended mutual fund that seeks to limit its investments to a specific industry or economic sector, for example; technology, real estate or health care. These funds may involve a greater degree of risk than an investment in other mutual funds with greater diversification.

Typically sector funds are more volatile than the majority of growth funds. This volatility springs from: (1) the fact that the majority of stocks in a particular sector fund move together, thereby magnifying the fund’s movement; (2) the focus of the sector fund manager only on stocks in that sector, enabling him or her to target high potential stocks; and (3) the rotation of “in” and “out” sectors at particular times.

What’s a Doctor to Do?

A physician-investor in sector funds needs a strategy that will target sectors on the upswing and signal when to move out of declining funds.

When selecting sector funds, some like Editor-in-Chief Dr. David Edward Marcinko; MBA CMP™ recommend building a list of funds that are manageable, full of choices in all types of markets, diversified (three to four funds for an aggressive portfolio or 10–12 for a less aggressive approach); and liquid. Newer ETF sectors may also be used.

Balancing Act

Also, develop a healthy balance—not a “hit-or-miss” approach. Marcinko and others suggest using the “relative or weighted strength” approach for sector selection by computing the percent change in the price of funds over a certain number of days and then ranking them for short-term, intermediate, and long-term periods.

With respect to determining the proper timing for buying or selling, some suggest the use of an individual fund timing system, such as comparing the current Net Asset Value [NAV] of the sector against a moving average for 60 or 90 days or combining both short- and long-term moving averages.


In creating buy-and-sell signals:

  • Keep it simple and manageable.
  • Do not look for perfection.
  • Practice patience.
  • Cut losses and let profits run.
  • Stick with your relative strength.
  • Buy/sell signals consistently.


Most of all, be prepared to invest the time necessary to learn sector funds, especially after the 679 point market collapse today; courage!


Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com


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One Response

  1. Pulling the Plug on Some Sectors,

    Some sectors funds are too narrow. For example, the offerings of HealthShares Dermatology & Wound Care ETF, had roughly only $2 million in assets when the plug was pulled and it expired.



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