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Jul20
Sector-Neutral Funds

Regular readers know I am a fan of index funds.  I believe they are superior investments for the majority of individual investors.  The S&P 500 Vanguard fund has beaten 60% of all actively managed domestic stock funds since 1996. 

Some fund managers are now trying to tweak those returns through some active management.  They are pursing a sector-neutral strategy.  If you take all the stocks in the S&P 500 you can categorize them by industry sector.  By adding up the market capitalization of each of the companies in each sector, you can come up with sector weights.  In this strategy the sector weights are kept constant.  What the fund manager varies are the companies that make up the sector.

For instance, if the Transportation sector included Ford, GM and Toyota, the manager might over weight GM, not own any Ford at all and keep Toyota at its weight in the index.  The GM overweight and the Ford underweight would be sized to keep the amount of money invested in the Transportation sector the same as the index.  But, the company weights differ.  The fund manager might even include companies that are not in the index.

 

The Forbes Investment Guide from June 2006 in an article titled "The Not-Quite Index Funds" by David Serchuk and James M. Clash found for sector neutral funds they like.  They are Pioneer Research-A, T Rowe Price Capital Opportunity, Turner Core Growth-II, and Vanguard Growth & Income-Inv

If you like index funds but want to walk on the wild side and add a little risk to the equation check out sector-neutral funds.

 

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2 Comments/Trackbacks




The biggest question is: how do the expense ratios compare to straight index funds? I am sure any 'active' management would make the manager feel that he/she is intitled for a bigger piece of the pie.

As far as I am concerned, the signficant difference in expenses is by far indexing greatest advantage.

I agree. Also, you can get a broadly diversified portfolio all in one purchase. Fees are critical to performance, always.

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