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Fund Spy

Watch Out for Extreme Concentration in Sector Funds

Sometimes just a few stocks dominate these portfolios.

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Sector funds have been around for decades. But in recent years the explosion in the number of exchange-traded funds has widened the range of options in this field. For investors seeking to fine-tune their allocations after the 2008 financial-system meltdown, such niche offerings, whether in ETF or mutual fund format, can be tempting choices.

Although investors can easily build suitable investment plans without narrowly focused portfolios, sector funds can serve a purpose. Some are useful for short-term traders (ETFs often play that role), while certain sector funds in the mutual fund format have developed into impressive long-term options. Whatever the reason that investors might be looking at sector funds, though, it's important to know what these funds own. Some are so concentrated they may give you second thoughts.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.