Menu

Sector funds: waste of time or worthwhile?

Home Retirement Accounts Sector funds: waste of time or worthwhile?

  • Avatar Krentist 
    Participant
    Status: Dentist
    Posts: 101
    Joined: 08/21/2018

    I’ve got my asset allocation pretty sorted out and I’m guided by my IPS and am 100% in passive index funds in Fidelity (housing my 403b).

    I’ve been intrigued by the possible addition of some of the speciality/sector funds (ie healthcare sector funds).

    The reasons are abundant why they should not be included:

    —higher fees (75bp vs my passive funds with an average of 6bp) eating away at profits

    —double dipping into my field of work (when it rains, it pours so it essentially de-diversifies me)

    —overall uncompensated risk

    —despite solid prior returns, no reason to think that’ll be the case moving forward

    Having said that, can someone construct a reason why I would want to consider this (or other sector funds) in my tax sheltered account? I’m trying to understand why someone would want to BUY this versus be SOLD this.

    I’m forecasting responses along the lines of “stop trying to be cute with investments and stick to 6bp passive index funds”. I’m guessing I’ll get more in favor of this plan. Worth an ask. TIA!

    #197098 Reply
    CordMcNally CordMcNally 
    Participant
    Status: Physician
    Posts: 2139
    Joined: 01/03/2017

    I’m confused by your post. You state that you are intrigued about sector funds and then you shoot down your own thoughts with very good reasons. I think the risks outweigh the benefits with most sector funds.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #197100 Reply
    Avatar Krentist 
    Participant
    Status: Dentist
    Posts: 101
    Joined: 08/21/2018

    I’m intrigued. Yes. But I know better.

    I just want to see if there’s a counter argument that exists to negate some of the cons I presented.

    I assume not.

    But good to try to tear down my current understandings; maybe I’ll learn something new. Almost assuredly I’ll learn something new. The more I know, the less I realize I know.

    #197107 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016

    Having said that, can someone construct a reason why I would want to consider this (or other sector funds) in my tax sheltered account?

    Click to expand…

    because you want to.

    thats it.

    its a bet.

    #197110 Reply
    Liked by Krentist
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1465
    Joined: 01/08/2016

    I have some money in sector funds.  Some that I bought in to, and a couple that I have created with a basket of stocks.  Altogether, it is a small amount of my net worth and it scratches my itch of doing something.  Maybe I will outperform, maybe it is a waste of time.

    By the way, I do this in my taxable account so that I can TLH.  And the way things are shaping up, LTCG will be a better rate than income tax when I start taking withdrawals.

    Besides, my 401k is pretty boring and I want to “stop trying to be cute with investments and stick to 6bp passive index funds”.

    #197114 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 802
    Joined: 02/11/2019

    Some of the sectors have had a smoother ride in the past if you cannot tolerate volatility. Not saying that it is going to continue that way but it is a reason some people have mentioned. This is likely at a cost of decreased return.
    I agree with all your consideration and I just ride the index.

    “Never let your sense of morals prevent you from doing what is right.”

    #197393 Reply
    IntensiveCareBear IntensiveCareBear 
    Participant
    Status: Physician
    Posts: 138
    Joined: 12/22/2018

    They sector funds are a tool, but I don’t find them to be particularly useful. You usually want a totally passive approach (indexing) or an active approach (stocks, no fees).

    Index funds usually have 0.04 fees or thereabout. You have minimal variability and will get average returns (minus tiny fee).

    Sector funds (like the XL- family) usually have 0.13 fees. No idea where you are seeing 0.75??? You have fair variability, returns more variable.

    Single stocks have no fees. You find greatest variability and returns are quite variable, esp in the short term. That is very good or very bad, depending on your interest level and experience.

    Sectors obviously tend to be hotter or cooler than the market average for awhile… then the opposite. That would mean that, to do well with sectors, you’d have to be monitoring the market fairly closely.  As long as you’re monitoring the market regularly, why not just buy the single stock(s) (ie, Google, FB, Charter, CenturyLink, and/or AT&T if you wanted communications) and pay no fees? If you don’t like FB, you can avoid it, but you can’t do that with index or sector funds.

    Much like the index funds and total S&P, the bad sector stocks drag the good ones and you get average sector results. Several airlines could be doing well financially, but if Boeing crashes a jet over the weekend, the whole industrial sector suffers for awhile (see today). Sectors can be hard to predict, also… if you look at the Barrons panel or WSJ, they are usually all predicting different sectors to be the best and worst performers for the upcoming year/quarter/etc (I actually see a bit more consensus with them recommending stocks, since at least each stock has financial fundamentals to analyze). Top rule of markets is always “nobody knows anything,” though. If you want average results, you might as well well do broad indexes and pay lower fees than sector funds.

    The primary sector fund usefulness I can see is that if you wanted to take a “duck and cover” strategy for a bear market: Utilities and Consumer Staples sector funds pay good dividends and would be a decent choice (better than bonds usually, esp if anticipated bear market does not occur… and less variable than buying single utility or staple companies). The sector ETF could help to minimize bad decision making; bear markets are stressful times for everyone. Predicting rain and making a defensive portfolio is generally not a good idea, though – esp not long term. Up markets and sideways happen a lot more than depressions. On the flip side, bull markets theoretically favor energy, financial, consumer disc, and maybe materials sectors… but you will probably do significantly better in buying single stocks than sectors in that environment. High tides raise all ships… but best ships go higher than average.

    Sector funds are unfortunately most used by people looking to be “diversified” or heavier in a sector type. They pick the sector funds since they don’t know much about it or care to pick any single companies from that sector… but, in that case, should they really be investing in that??? That is what novices do… buy “international index” or “bond fund” or “small caps” to think they are sophisticated, when they really have no idea what it means or what companies it the fund even holds or what to expect from it. Then they call other people who buy researched single stocks “gamblers,” lmao.

    At the end of the day, it goes back to the Buffet saying that “diversification is a defense against ignorance.”  Either be ignorant or get educated… and act accordingly. The biggest stock market risk are the ignorant folks who pretend to be competent. They will usually get fleeced by money managers or ruin their portfolio themselves with fees and bad holdings. The middle ground is always the dangerous place… think teenagers who know how to drive but can’t drive well. Again, in my estimation, you either want to be basically passive and just do very broad index (IVV, VOO, VTI, SPY, etc type stuff) or do an active approach in which you educate yourself, follow the market, and do some single stocks (with some low cost index broad market, sector, sub-sector, commodity, etc ETFs in there too if you want).

    Personally, I have rarely owned a sector fund. The reasoning is simple: I want the increased variability with single stocks, no fees, and ability to analyze basic company fundamentals before I buy. I would be pretty frustrated if I bought the overall materials sector ETF… then EcoLab got a huge lawsuit, dropped 20% in a week, and the sector ETF floundered. I would have rather bought DuPont, or PPG, or even EcoLab itself… and then had a chance to sell DuPont or PPG… or double down on my EcoLab holdings if the lawsuit seemed like nonsense or depressed the price more than seems rational. Any one of those situations can be good for me (DuPont or PPG made money and can be sold, or EcoLab might be a fantastic comeback opportunity). What canNOT be good for me is owning the whole sector in that case; it probably failed to beat S&P (some of its component stock did well, others didn’t, EcoLab bombed), and the sector ETF also won’t get nearly full benefit of any EcoLab rebound since that is only a small piece in the sector. While it did what it set out to do, the sector ETF just did average of those three and 25+ other materials companies… and charged fees all the way. Why be average? GL

    #197497 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016
    but if Boeing crashes a jet over the weekend, the whole industrial sector suffers for awhile (see today).

    Click to expand…

    with all three indexes positive so far….

    #197502 Reply
    IntensiveCareBear IntensiveCareBear 
    Participant
    Status: Physician
    Posts: 138
    Joined: 12/22/2018

    but if Boeing crashes a jet over the weekend, the whole industrial sector suffers for awhile (see today).

    Click to expand…

    with all three indexes positive so far….

    Click to expand…

    I don’t think I understand what you are getting at. Are you saying that because an index is positive that it is doing well or unaffected by one of its components? For today @10 PST:

    DOW +0.38% (contains Boeing + 29 companies)

    S&P +1.18% (contains Boeing + over 500 companies, but Boeing is one of the larger holdings)

    Nasdaq +1.71% (no Boeing)

    Boeing -7.07% (ya)

    3M  +2.52% (same industrial sector, but independent)

    XLI +0.27% (industrials sector ETF, contains Boeing + approx 30 companies)

    …all I said that Boeing drags the industrial sector ETF today. That is a downside to sectors. It is lagging the market overall because one of its biggest players had a sizable drop. Anyone who owns industrials sector (or DOW 30 index for that matter… S&P 500 index only on a smallish scale) gets punished by that. They would be doing better without that company, but it comes as part of the defensive package deal that is indexing. People who own single stocks not named Boeing Airlines (ie 3M or Union Pacific, other big industrials) don’t get that Boeing plane crash tail wind today. Do you disagree?

    #197521 Reply
    Avatar Peds 
    Participant
    Status: Physician
    Posts: 3618
    Joined: 01/08/2016
    I don’t think I understand what you are getting at.

    Click to expand…

    nothing in particular. had no idea what the market was doing until i read that comment.

    you have made comments in the past about avoiding “the bad stocks” i believe.

    did boeing make that list previously?

    #197522 Reply
    IntensiveCareBear IntensiveCareBear 
    Participant
    Status: Physician
    Posts: 138
    Joined: 12/22/2018

    @peds , I would never give specific recommendations of “good” or “bad” stocks. It’s impossible.^^^

    That is why any WSJ or stocks journal or Barrons article is basically useless and outdated in less than a month (most of it in less than a week). What was a good buy at $25 might be a sell at $29 (or might have dropped to $22 on new ER released a few days after that recommendation was published). Similarly, a company that was viewed as an industry leader one quarter could be facing significant competition and supply problems or have switched CEOs by the end of the year. It is dynamic and variable.

    Personally, I think just about any company is potentially “good” if the price is right and the investor has done their homework. The only possible exceptions are the ones with terrible management, diversification or acquisitions into industries they have no business in (esp if they took debt to do that), or corporations with cancerious debt and lacking sufficient sales flowing in… or companies that the investor doesn’t understand or is just uneasy about. There are thousands of options, so anyone can take all the time they like to find favorites that make sense.

    Even among the stalwart American companies that are Dow listed (or past listed) such as Honeywell, P&G, Visa, Microsoft, CocaCola, J&J, AT&T, Walmart, etc… I bet all of those have been listed as buy/hold/sell and over/under priced at many various times over the years. Boeing would be no exception. It is always dynamic. What is a “good” buy right now might be “overpriced” in the WSJ in a couple months. There is certainly no set-it-and-forget it stock or sector, though… that is basically what broad market indexes try to be, and that is why the get average results – minus fees.

    When I bring up individual company/stock names of stocks like McD or Taco Bell or Ford or Chrysler, I just use those companies that most people have heard of to make examples and try to show a point quicker. I think a real or hypothetical scenario using a story with known actors works better to accomplish that in a lot of cases. That’s all. GL

    #197863 Reply

Reply To: Sector funds: waste of time or worthwhile?

In case of a glitch or error, please save your text elsewhere, clear browser cache, close browser, open browser and refresh the page.

Notifications Mark all as read  |  Clear