Technology, Financials, Consumer Cyclicals, Consumer Staples, Utilities & Health

You can opt-out at any time.

This is a two-page list of industrial sectors that provides some of the best funds and ETFs for investing within each respective industry as well as simple definitions and examples for each sector. Most of the funds listed are index funds and ETFs because these fund types typically provide the best exposure to the respective sector in terms of broadness, diversity and below average expense ratios .

This first page includes the consumer-driven and defensive industries of Technology, Financials, Consumer Cyclicals, Consumer Staples, Utilities and Health Care.

The technology sector is a category of stocks that contains technological businesses, such as manufacturers producing computer hardware, computer software or electronics and technological service industry companies, such as those providing information technology and business data processing. Some examples of technology companies include Apple, Microsoft, Google and Netscape Communications.

Finding the best technology sector funds and ETFs can be difficult and misleading. For example, it is a common mistake to think of the Powershares QQQ ETF as a pure technology fund because it tracks the NASDAQ 100 Index. This can be considered a pure growth investment strategy but QQQ holdings in technology only represents around 50% of the portfolio.

Also, many technology sector funds focus on one sub-sector of technology, such as computers, networking, semi-conductors, or electronics. However, it is best for most investors to use a broadly diversified technology sector fund.

For funds that hold at least 90% technology stocks (as of this writing), one of the best sector mutual funds is Fidelity Select Technology (FSPTX ) and one of the best technology ETFs is iShares US Technology ETF (IYW ).

The financial services sector (aka financials) consists primarily of banks, credit card companies, insurance companies and brokerage firms. Examples include Bank of America, Wells Fargo, Goldman Sachs, and MetLife. Strategically, financial stocks do best in a low interest rate environment when financial services, such as mortgages, loans and investments, are in demand.

There are more than 100 mutual funds and ETFs that specialize in financials but one of the best financial sector index funds is Vanguard Financials Index (VFAIX ) and one of the best ETFs is iShares US Financial Services (IYF ).

Consumer cyclical goods or services are those that are not considered necessary. Also called leisure or discretionary goods and services, their consumption is dependent upon economic cycles, hence the name consumer cyclical.

For example, during periods of economic growth retail sales of leisure goods or services, further categorized as durable or non-durable, such as automobiles and hardware (durables) or entertainment and hotels (non-durables), are typically higher than in times of economic recession, when only the primary consumer staples goods may remain in demand. Put simply, consumers spend more on luxury (non-necessary) items when times are good and less on these items when times are tough.

As with most sector funds the Consumer Cyclicals sector has several sub-sectors. For example an investor can buy shares of a specific cyclical stock sector fund that concentrates only in the automotive industry. However most investors are wise to get broader exposure to sectors by choosing the diversity of index funds and ETFs.

One of the best Consumer Cyclical sector index funds is Vanguard Consumer Discretionary Index (VCDAX ) and one of the best Consumer Cyclical ETFs is SPDR S&P Retail (SRT ).

Consumer staples are products, such as food, tobacco, and beverages, that consumers consider to be essential for day-to-day living. Therefore stocks of companies that produce such products are said to be defensive or non-cyclical stocks because consumers are unwilling to stop buying and consuming the products even during economic recession. Examples of consumer staples companies include General Mills, Inc (food), Philip-Morris, Inc (tobacco) and Coca-Cola Co (beverages).

Consumer staples stocks are considered defensive stocks because they tend to maintain more price stability in a down market than other stocks, such as growth stocks. For example, during a recessionary period, consumers still need staples, such as cereal and milk, or they may even increase consumption of so-called sin stock products, such as cigarettes and alcohol. Knowing this, many investors will buy defensive stocks when they believe recession is likely to occur in the short-term.

A good way to get broad exposure to the Consumer Staples sector is with the diversity and low expenses of an index fund or ETF. One of the best consumer staples index funds is Vanguard Consumer Staples Index (VCSAX ) and among the best ETFs is Consumer Staples Select Sector SPDR (XLP ).

Utility is an economic term that generally refers to the ability to satisfy needs or wants; it describes the usefulness of a good or service. For this reason, companies that produce a good or service that provides utility to consumers are classified under the industrial sector of Utilities.

You are already familiar with utilities in your day-to-day life and likely associate the term with your utility bills, which go to pay for everyday services, including the public utilities, such as phone, gas, water and electric.

With regard to investing, and according to Morningstar. Utilities fund portfolios seek capital appreciation by investing primarily in equity securities of U.S. or non-U.S. public utilities including electric, gas, and telephone-service providers. In simpler terms, utilities funds are sector funds that invest in stocks of companies within the utilities sector.

Utilities stocks are also considered defensive stocks because they tend to maintain more price stability in a down market than other stocks, such as growth stocks. For example, during a recessionary period, consumers still need services, such as gas, phone and electric. Knowing this, many investors will buy defensive stocks when they believe recession is likely to occur in the short-term.

As with most industrial sectors, there are sub-sectors within the general category of utilities. For example, if an investor wanted concentrated exposure to phone companies, such as Verizon and Comcast, they may consider a mutual fund like Fidelity Telecom and Utilities (FIUIX ). However sector funds are already concentrated and sub-sectors can be too narrow and thus more risky. So it is wise for most investors to take advantage of the diversity and low expenses of an index fund or ETF, such as Utilities Select Sector SPDR (XLU ).

Utilities stocks are also known for paying dividends. So if you are looking to add dividend mutual funds to your portfolio for income, you may consider adding a utilities sector fund.

Healthcare, also known as health or specialty-health, is a stock investing sector that focuses on the healthcare industry. The healthcare sector is quite broad. Even a person with no investing experience can think of some specific area of the health industry, such as hospital conglomerates, institutional services, insurance companies, drug manufacturers, biomedical companies, or medical instrument makers. Examples include Pfizer, United-Healthcare, Cigna Corp, Abbott Laboratories, and HCA Holdings, Inc.

A good way to gain broad exposure to the healthcare industry is through the use of a health sector mutual fund, such as Vanguard Health Care (VGHCX) or T. Rowe Price Health Sciences (PRHSX) .

Investors can use health sector funds as a tool to diversify a larger portfolio of mutual funds. The health stocks are often considered defensive stocks because of their relatively low correlation to broad stock index funds, such as S&P 500 Index Funds. that many investors use as core holdings in a diversified portfolio. When many industries are doing poorly due to negative economic conditions, the health industry can still perform relatively well because people still need to see the doctor and buy their drugs, regardless of economic conditions.

Health care has also been at the center of political debate and divide many times in recent history because the costs and accessibility of health care are passionate and personal topics for voters. Congressional legislation can positively or negatively impact some sub-sectors of healthcare. Also, expiring drug patents for widely used pharmaceuticals can negatively impact a drug manufacturer or, conversely, an FDA approval of a breakthrough drug can have positive impact. A recent example of political impact on health stocks is the Affordable Care Act, commonly known as Obamacare, passed by Congress during the Obama administration. Some stocks advanced, such as hospital corporations while others declined, such as insurance providers. However, the overall net effect on the broad health sector was minimal. This speaks to the wisdom of diversification of mutual funds, index funds and ETFs that provide broad exposure to the health industry.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.