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Understanding investment types

What are sector and specialty funds?

4 minute read

Sector funds, also known as specialty funds, are mutual funds and ETFs (exchange-traded funds) that concentrate on a specific industry or market.

These funds take a targeted approach and invest only in companies in certain segments of the economy. Because of their narrow focus, they offer less diversification which means they come with higher potential risks.

Concentrating on a sector can increase your exposure to risk

Sector mutual funds and ETFs give you access to a small part of the overall market, such as energy, real estate, or health care, for example.

Though many of these narrowly focused funds and ETFs have the potential to grow, you should be equally prepared to experience wide swings in the value of your investments—including potentially large losses.

Get more diversified exposure to sectors 

If you're not comfortable with the increased risk and volatility sector mutual funds and ETFs present, consider a few funds that provide broad coverage of the major industries.

Whether you're interested in U.S. or non-U.S. stocks, fund options are available that provide a diversified mix of securities in a single fund.

Choose a specific sector fund

If your current portfolio is broadly diversified, you may already have sufficient exposure to the sector you're interested in. Only consider increasing your exposure to narrowly focused funds if you're comfortable with the added risk.

Browse a list of Vanguard sector mutual funds

Browse a list of all Vanguard sector ETFs

Sustainable investing with specialty funds

Are you part of the growing community of investors who want to invest in companies with strong environmental, social, and governance (ESG) track records?

We offer a lineup of ESG investments that can help you achieve your financial goals and match your dollars with what matters to you.

Explore ESG investing with Vanguard

What risks can I expect with sector funds?

Vanguard classifies sector funds as aggressive, which means they can be subject to extremely wide fluctuations in share prices. At a high level, here are some of the risks involved with specialty funds:

  • Industry concentration risk. A fund that targets a specific industry will generally be more volatile than one that invests more broadly. There's a chance that particular problems could affect an entire industry.
  • Stock market risk. Stock markets tend to be cyclical and can have periods of rising and falling prices. There's a chance that stock prices overall could decline. Funds that invest in foreign stocks could be riskier than U.S. stock funds since foreign stocks can be more volatile and less liquid than U.S. stocks. 
  • Asset concentration risk. Targeting a certain sector could mean the fund invests a high percentage of assets in its 10 largest holdings. The fund's performance could be hurt disproportionately by the poor performance of a few holdings.
  • Nondiversification risk. Sector funds are considered nondiversified, which means they may invest a greater percentage of their assets in particular securities than most mutual funds. There's a chance the fund's performance could be hurt by the poor performance of relatively few stocks or a single stock.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. Investments in stocks issued by non-U.S. companies are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by companies in foreign countries or regions; and currency risk, which is the chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates.

You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules for limits. Vanguard ETF Shares are not redeemable directly with the issuing Fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.

ESG funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider or advisor, as applicable, for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria. The index provider or advisor's assessment of a company, based on the company's level of involvement in a particular industry or their own ESG criteria, may differ from that of other funds or an investor's assessment of such company. As a result, the companies deemed eligible by the index provider or advisor may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics. The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies. Successful application of the screens will depend on the index provider or advisor's proper identification and analysis of ESG data. The advisor may not be successful in assessing and identifying companies that have or will have a positive impact or support a given position. In some circumstances, companies could ultimately have a negative or no impact or support of a given position.