In early 2002, while technology funds continued to tumble, several sectors showed obvious signs of life. Precious metals funds attracted substantial amounts of investors’ money, due to strong performance. Energy/natural resources funds also enjoyed inflows and so did some smaller categories, such as defense and leisure.
The big winner, though, was the real estate category, where net inflows were over $1 billion, more than three times the amount moving into precious metals. The strength in real estate values may be showing up in investors’ preferences for mutual funds.
Some investment pros contend that sector funds can add diversification to your portfolio while providing the potential for additional returns. Instead of familiar mutual funds, you may be better off with exchange-traded funds (ETFs), especially iShares. ETFs are index funds so their costs tend to be about half the costs of actively managed sector funds. Exchange-traded funds are tax efficient, too, because investors are not buying someone else’s basis, for tax purposes. A higher basis eventually will mean a lower tax bill.