The Search for Sector Stars
Rules from mutual-fund experts on how to pick sector funds:Skip to next paragraph
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* Through various sources - your broker, friends, books, the press, and other media - identify a strong trend in the economy. Are demographic changes altering consumer habits? Is inflation looming? Does the ascent of a political party foreshadow regulatory and policy change? Will the weather be unusually foul - or good? Answers could point to huge potential profits.
Example No. 1: The mother of all promising sectors right now is technology. The US economy demands efficiency, information, entertainment, and innovation, and although it makes up just 6 percent of the economy, high-tech since 1995 has accounted for more than a quarter of economic growth.
Example No. 2: Some mutual funds narrow their tech focus on a sector slice about to explode. One area is telecommunications, and one number tells it all - the volume of phone-line data traffic is doubling every year.
* Review out-of-favor sectors that may be ready for a rebound. Example: Utilities and technology, this year, have switched places. High-tech dazzles while investors have unplugged the utilities.
* Identify the best-performing funds within your chosen sectors. Morningstar, a publication available in libraries or on the Internet (www.morningstar.net) keeps a running rank of sector funds.
* Stick to sectors you know or can closely watch. Consider a sector fund or two to supplement, not replace, core holdings, such as a large-company fund.
* If you plan short-term rotations among sector funds, try to make your moves in a retirement account, with its shelter from capital-gains taxes.