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Narrow Sector Index Funds for Sector Rotation Systems

Many investors like to use narrow sector index funds as a good blend that captures some of the trending tendencies of individual stocks, but with significantly less volatility as a vehicle for a sector rotation system.

While not strictly index funds, the Fidelity Select funds offer most of the advatantages that investors are looking for in narrow sector funds. thye are actively managed however, but in our studies it seems that the Fidelity Select funds tend to trend better than some strictly index funds, like the Profund series of sector funds. This may be due to the phenomenon of “Fido-izing” the stocks being held, which is where because of it’s size, as Fidelity adds to its positions in a stock it will tend to accelerate somewhat. Or maybe it’s just great stock picking on the part of Fidelity’s fund managers. For whatever reason, the Select Funds have historically tended to trend well enough that even with the 30 day holding period they can be traded profitably.

As we mentioned, the Profunds family (as well as the Rydex family of funds) both include some more narrowly defined leveraged funds that track narrow indices. They also have the advantage of no minimum holding period. But in testing these funds we have not seen the tendency to trend nearly as much as the Fidelity Select Funds, so we’ve never offered a Profunds or Rydex funds sector rotation model.

Filed under Sector Rotation

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