How To Find The Best Sector Mutual Funds 1Q22

With an ever-growing list of similar-sounding mutual funds to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor?

Don’t Trust Mutual Fund Labels

There are at least 182 different Real Estate mutual funds and at least 623 mutual funds across eleven sectors. Do investors need 56+ choices on average per sector? How different can the mutual funds be?

Those 182 Real Estate mutual funds are very different from each other. With anywhere from 25 to 171 holdings, many of these Real Estate mutual funds have drastically different portfolios with differing risk profiles and performance outlooks.

The same is true for the mutual funds in any other sector, as each offers a very different mix of good and bad stocks. Telecom Services ranks first for stock selection. Real Estate ranks last.

Avoiding Analysis Paralysis

I think the large number of sector mutual funds hurts investors more than it helps. Deep analysis on a mutual fund-by-mutual fund basis is simply not a realistic option so investors are exposed to insufficient analysis, missing profitable opportunities, or both. Analyzing mutual funds, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each mutual fund. As stated above, that can be as many as 171 stocks, and sometimes even more, for one mutual fund.

Figure 1 shows the top rated mutual fund for each sector.

Figure 1: The Best Mutual Fund in Each Sector

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity

Amongst the mutual funds in Figure 1, Fidelity Select Portfolios: Insurance (FSPCX) ranks first overall, Fidelity Select Portfolios: Tech Hardware (FDCPX) ranks second, and Schwab Health Care Fund (SWHFX) ranks third. Baron Real Estate Fund (BREUX) ranks last.

How to Avoid “The Danger Within”

Why do you need to know the holdings of mutual funds before you buy?

You need to be sure you do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the mutual fund’s performance will be bad.

PERFORMANCE OF FUNDS HOLDINGS = PERFORMANCE OF FUND

If Only Investors Could Find Funds Rated by Their Holdings

Fidelity Select Portfolios: Insurance (FSPCX) is not only the top-rated Technology mutual fund but is also the overall number one-ranked sector mutual fund out of the 623 sector mutual funds that I cover.

The worst mutual fund in Figure 1 is Baron Real Estate Fund (BREUX), which gets an Unattractive rating. One would think mutual fund providers could do better for this sector.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, or theme.