Introduction To Sector Investing

Introduction To Sector Investing

The economy has natural cycles that include periods of expansion and contraction.  Navigating investments through any economic cycle can be challenging at certain times.  Sector funds can be a smart way to position yourself if done correctly. 

Why should investors use sector funds and when is the best time to invest in them? There is definitely a right way and a wrong way to go about using sector funds. So before acting, it’s a good idea to educate yourself.  Here is a list of sectors and examples of companies that would be found in that sector.

Financial

Sector funds will hold stocks of companies in the financial industry. For example, companies like Bank of America, Goldman Sacs, and Wells Fargo. Financial stocks can include more than just banks and brokerage firms.  Insurance companies, mutual fund companies, and financial planning firms would all fall under this sector.

Consumer Cyclical

Consumer cyclical companies sell things that people don’t need for daily living. Therefore, consumer cyclical stocks also called consumer discretionary or leisure will tend to do better when the economy is stronger and consumers are more apt to spend on this part of the budget. Companies in this sector include the likes of Disney, Target and Starbucks.

Consumer Staples

Pretty much the opposite of consumer cyclical, companies in this sector typically provide products and services that are actually needed for everyday living. Some examples of consumer staples companies include Wal-Mart, CVS and Procter & Gamble. Consumer staples sector can also include companies that sell things that consumers don’t really need but will continue to buy, regardless of the economy. Companies that fit this examples include Coca-Cola and Philip Morris. 

Technology

This sector will invest in stocks of companies that produce technology products or offer technology-based services. Examples would include a software manufacturer like Microsoft, an online retailer like Amazon, a social media site like Facebook or a firm like Alphabet which is the parent company of Google, which produces multiple products and services within the industry.

Utilities

When you think about the utilities sector, think of companies that provide gas, electric, and telephone products and services to the consumer. Utilities sector companies include Duke Energy and Southern Company. Like consumer staples, utilities provide products or services that consumers still use when the economy weakens. Therefore, sector funds that invest in utilities can perform better when a recession strikes and for this reason, utilities are known for being defensive.

Natural Resources

Sector funds focused on natural resources typically invest in the commodity-based industries such as energy, chemicals, minerals, and forest products. Therefore, shareholders of these sector funds will get exposure to big energy stocks like Exxon Mobil and Chevron but also precious metals miners like Agnico, Eagle Mines and Newmont Mining Corp.

Health Care

This sector focuses on the healthcare industry, which can include hospitals, institutional services, insurance companies, drug manufacturers, biomedical companies and medical instrument makers. Companies in this sector include Pfizer, United-Healthcare and HCA Holdings, Inc. Health sector funds can and often hold biotech stocks like Gilead Sciences or Biogen. This sector can also be considered defensive because they can hold up better than the overall market during downturns. Consumers will still need medications and healthcare during recessions.

Real Estate

This sector typically concentrates holdings in real estate investment trusts which are entities that represent a collection of investor money pooled together to purchase income-producing properties like office buildings and hotels. REITs have a legal requirement to pay out at least 90 percent of their income to shareholders which makes this sector attractive to investors looking for income-production. Real estate sector includes companies like Simon Property Group and Public Storage.

Once you understand the different sectors and how sector funds work, you can begin to learn how to choose the best for you and your investment strategy.  When used correctly, sector funds can reduce the risk for the overall portfolio while potentially maximizing returns in the long term.

The information in this article and found on the rest of the site is for educational purposes only and in no way investment advice.  This information is not a recommendation to buy securities.