The Funds: Equities II (Sectors & Regions)
In the last section, we introduced what funds are and started talking about some of the different categories of equity funds. In this section, we will go over other important equity fund categories and we will discover bond and mixed funds.
Industry or Sector Specific Funds
Before taking a deeper look, it is worth clarifying what sectors and industries are. A county’s economy is made up of all the businesses and endeavors in it, and it is divided into different areas (sectors) in order to make it easier for people to analyze and understand it as a whole; then, sectors are broken down into industries.
What are sectors and industries?
An industry is a group of all the businesses that operate within the same line of work, with similar products or services. A sector is a larger section of a country’s economy, and it comprises all the related industries. In most modern economies, there are typically about twelve different sectors. Each one encompasses many industries and all the sectors together should make up an entire economy. Think of it as a textbook (a country’s economy) that is broken down in different chapters (sectors), and each chapter is consequently divided into different sections (industries) which makes it easier for the reader to follow the plot. A sector is a group of all the businesses that operate within the same line of work, with similar products or services.
An example of a sector could be the Utilities Sector, which is comprised of a diversity of industries that provide the basic needs of every household or business (electricity industry, natural gas industry, water industry, sewage industry, etc.)
Main sectors in the US
- Technology Sector
- Financial Sector
- Utility Sector
- Healthcare Sector
- Real Estate Sector
- Consumer Discretionary Sector
- Consumer Staples Sector
- Industrials Sector
- Materials Sector
- Energy Sector
- Communications Sector
Sector division or denomination may vary in different countries or even in different regions, but the above is a general list of the main sectors that make up the US economy. We will cover each one in separate sections later in the courses.
Think back on the example we laid out in the previous section, where you and your friends invested all your capital in companies that operated in the renewables sector. That would be known as a sector fund. A sector fund invests all or most of its capital in public companies that operate in a specific sector (like the Renewables, or the Utilities sectors). Each sector offers different investment characteristics, different risk levels, and growth prospects; therefore, sector funds are ideal for investors to diversify their portfolios. You can create broad investment strategies by choosing the best sector allocation that matches your characteristics in different economic environments.
These types of funds are managed by professionals who target all their investments to a specific geographic location or region. They normally manage a diversified portfolio of stocks from companies that operate in (or are based in) specific countries, regions, or continents. For instance, Pacific Region equity funds or North America equity funds allocate their capital in diversified portfolios of stocks from those broad geographic areas; however, China equity funds or US equity funds, focus on stocks from those specific countries.
International funds own diversified portfolios of stocks from anywhere except their own countries. For instance, if you and your friends lived in the US and decided to create an international equity fund for US investors, you would create a diversified portfolio of equities from companies in Europe, Pacific Region, Canada, and Latin America (no investments in US companies). This type of funds offers local (in the example, US) investors the opportunity to get pure foreign exposure, to diversify in other countries outside of their own country.
There are also regional funds that target specific sectors or investment strategies in a certain geographic location. Such as European growth stock funds, or Asian technology funds. They allow investors to diversify even further into different asset classes in various regions.
By now, we understand what equity funds are and we have a good idea about what their purpose is: to offer diversification options to most investors. If funds didn’t exist, the average investor would have a hard time achieving a properly diversified portfolio. Let’s think about this for a second, if you had $1,000 to invest, you would be able to buy maybe 2 to 10 stocks or so, depending on their prices, which limits your diversification. However, with funds, you would achieve exposure to hundreds of companies with many different characteristics.
In the next section, we will finish up our discussion about funds by discovering bond funds and the other types.