How To Find The Best Sector Mutual Funds 1Q23

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

Don’t Trust Mutual Fund Labels

There are at least 152 different Technology mutual funds and at least 627 mutual funds across eleven sectors. Do investors need 57+ choices on average per sector? How different can mutual funds be?

Those 152 Technology mutual funds are very different from each other. With anywhere from 23 to 373 holdings, many of these 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. Energy ranks first for stock selection. Utilities ranks last.

Avoiding Analysis Paralysis

I think the large number of sector mutual funds hurts investors more than it helps. Manually conducting a deep analysis for every fund is simply not a realistic option. As a result, investors conduct insufficient analysis and miss profitable opportunities. Analyzing mutual funds with the proper diligence is far more complex than analyzing stocks because it means analyzing all holdings within each mutual fund. As stated above, there can be as many as 373 stocks or 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 excludes funds with Total Net Assets (TNA) under $100 million due to inadequate liquidity

Sources: New Constructs, LLC and company filings

Amongst the mutual funds in Figure 1, BlackRock Natural Resources Trust (MAGRX) ranks first overall, Fidelity Select Banking Portfolio (FSRBX) ranks second, and Schwab Health Care Fund (SWHFX) ranks third. Gabelli Utilities Fund (GAUIX) 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.


If Only Investors Could Find Funds Rated by Their Holdings

BlackRock Natural Resources Trust (MAGRX) is not only the top-rated Energy mutual fund, but is also the overall top-rated sector mutual fund out of the 627 sector mutual funds that I cover.

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

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