How to find the best sector mutual funds 2Q24

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

Don’t trust mutual fund labels

There are at least 148 different real estate mutual funds and at least 595 mutual funds across eleven sectors. Do investors need, on average, more than 50 choices in each sector? How are mutual funds different?

These 148 real estate investment funds are very different from each other. Many of these real estate investment funds have anywhere from 17 to 159 holdings in drastically different portfolios with different risk profiles and performance prospects.

The same goes for mutual funds in any other sector, as each of them offers a completely different mix of good and bad stocks. Energy ranks No. 1 in terms of stock picks. In last place are municipal services.

Avoiding analysis paralysis

I think the large number of sector mutual funds hurts investors more than helps them. Manually conducting an in-depth analysis of each fund is simply not a realistic option, leaving investors at risk of under-analysis and missing out on profitable opportunities. Analyzing mutual funds with due diligence is much more difficult than analyzing stocks because it means analyzing all the stocks in each mutual fund. As stated above, a single mutual fund can hold as many as 159 or more shares.

Figure 1 shows the top-rated mutual funds in each sector.

Figure 1: The best mutual fund in each sector

* Top mutual funds exclude funds with TNA below $100 million due to insufficient liquidity

Among the mutual funds shown in Figure 1, Invesco Energy Fund (IENSX) ranks first, Fidelity Advisor Consumer Staples Fund (FIJCX) ranks second, and Fidelity Banking Portfolio (FSRBX) ranks third. Baron Real Estate Fund (BREIX) takes last place.

How to avoid “inner danger”

Why do you need to know the resources of mutual funds before purchasing?

You need to be sure that you are not buying a fund that could explode. Buying a fund without analyzing its resources is like buying shares without analyzing its operations and finances. No matter how cheap it is, if it has bad stocks, the mutual fund’s performance will be bad.

FUND PERFORMANCE – FEES = FUND PERFORMANCE

If only investors could find funds rated according to their resources

Invesco Energy Fund (IENSX) is not only the highest-rated Energy mutual fund, but also the highest-rated overall sector mutual fund among the 595 sector mutual funds operated by my firm.

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

Disclosure: David Trainer, Kyle Guske and Hakan Salt receive no compensation for writing about any particular stock, sector or topic.