A sector fund in your future?

With the overall US stock market slipping and sliding and clawing its way through 2001, bold investors can take another avenue to eke out gains: buying into sector funds.

Such funds are often what market professionals call "pure plays." If the sector or category flourishes, as gold did earlier this year, the investor scores. If the sector starts to tank, as gold has begun to do of late, the portfolio sheds value.

Currently, areas that look promising, experts say, include biotechnology funds (for the long haul), real estate funds, and energy (or natural resources) funds.

Sheldon Jacobs, who publishes the No-Load Fund Investor, a market newsletter, is not a fan of sector funds, since they can play havoc with a small investor's portfolio "and are not really diversified," as mutual funds are designed to be, he says.

Yet, he says, for people who time the market, or are enamored with certain industries, they can be useful.

"If you really like a specific sector, you don't have to buy one or two companies in that sector. With a sector fund, you can buy all the major companies in the sector, and leave the stock-picking to an expert," he says.

Mutual-fund companies known for sector funds include Fidelity, T. Rowe Price, and Invesco. Fidelity, of course, has "written the book" on the funds, one analyst says with a laugh. Fidelity's "Select" group has funds that invest in leisure, paper and forest products, and transportation, to name just a few.

Currently, most sector funds are in the red - many of them in deep territory, according to information firm Morningstar Inc., in Chicago. Health funds are down l6 percent through July 30; communication funds are down 25 percent; technology down 33 percent. Even natural resource funds, which did relatively well last year, are down almost 8 percent.

The real estate sector is one of the few sectors making gains, up about 6 percent through July 30. (Only 23 percent of stock funds posted positive gains during the first half of the year, according to Weiss Ratings Inc., a provider of mutual fund ratings and analysis.)

Still, it's important to remember that the US economy is not one monolithic whole, says Arnold Kaufman, editor of "The Outlook," an analytical review published by Standard & Poor's Corp. At any point in time, some sectors will do better than others, he says.

Looking ahead, some attractive areas, says Mr. Kaufman, include consumer cyclicals (such as cars and home furnishings), specialty retailers, oil and gas companies, and specialized healthcare companies geared to the aging of the US population, he says.

"We think the [stock] market in general will improve later this year," Kaufman says. "Therefore, in picking sectors you want to look for sectors that do well in the early stages of a recovery, such as the home-furnishing area," which includes stores such as Home Depot.

For all their drawbacks, sector funds have fans. Aficionados tend to be market timers, short-term "performance chasers," or industry buffs, says Russ Kinnel, who heads up equity research for Morningstar.

One advantage of buying such a fund, he says, is that if you are already broadly diversified - but find a hole in your overall coverage - you can pick up that gap with a sector fund.

For example, you may not have enough in financial stocks, he says, which have done well in recent years. With a sector fund, you are immediately covered.

Moreover, the managers of such funds tend to be highly competent regarding their fields, Mr. Kinnel says, something that would be impossible for most small investors to achieve.

Still, the number of targeted funds (in the hundreds when micro-focused specialty funds are taken into account, although specific counts are hard to come by, given fund mergers) has been slowly shrinking in the past few years, he says.

In part, that reflects not only changes in the economy, but a perception by mutual fund companies that they may have overdone their own rosters of specific industry funds, Kinnel says.

"In general, most people are probably better served by buying well diversified general stock funds, rather than sector funds," says Kinnel.

"It's hard enough just to follow the overall market and all the diversified [mutual] funds," without also having to second guess what may or may not happen with sector funds, says Mr. Jacobs. Like Kinnel, he votes for owning a well-diversified fund, rather than going the sector-fund route.