Explore sector and specialty funds with Vanguard. Learn how these focused investments work and how they can help you target specific areas of the market.
What are sector and specialty funds?
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.
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.
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.