How To Find The Best Sector Mutual Funds 3Q22

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 185 different Real Estate mutual funds and at least 670 mutual funds across eleven sectors. Do investors need 60+ choices on average per sector? How different can the mutual funds be?

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Those 185 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. Financials 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. Manually conducting a deep analysis for every fund is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing mutual funds, 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, there can be as many as 171 stocks or more for one mutual fund.

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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 Financial Services Portfolio (FIDSX) ranks first overall, BlackRock Natural Resources Trust (MAGRX) ranks second, and Vanguard Materials Index Fund (VMIAX) ranks third. Baron Real Estate Fund (BREIX) ranks last.

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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 FUND’S HOLDINGS – FEES = PERFORMANCE OF FUND

If Only Investors Could Find Funds Rated by Their Holdings

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Fidelity Select Financial Services Portfolio (FIDSX) is not only the top-rated Financials mutual fund but is also the overall top-ranked sector mutual fund out of the 670 sector mutual funds that my firm covers.

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

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