Sector funds give you the ability to invest within a specific sector of the economy, selecting the exposure to given industries with which you are most comfortable. Unlike with broad market indexes like the S&P 500 or the Dow Jones Industrial Average, sector funds are more targeted and lack significant diversification. An example of a sector fund is an energy fund. If you believe that energy prices are going to rise in response to both the demand for oil and the general pressures of inflation present in the economy, buying an energy fund would be appropriate. This investment will give you exposure to a collection of energy stocks that should be representative of the sector.

There are approximately ten different sectors, depending on whose categories you prefer. These sectors range from utilities to consumer durables. Each sector is comprised of several industries, so if you want to drill down more, an industry fund may be more appropriate. The financial sector, for example, includes brokers, large banks and small banks. Each of these industries may be affected by slightly different forces, but they will generally behave as a group. Sector funds are particularly useful as a hedging option. If you believe a given stock within a sector will fall out of favor, owning the sector fund can protect you against a big move for the sector that may affect the stock you are short.

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