A Simple Sector Mutual Fund Strategy to Beat the Market

BY John Ruppel

The overall stock market has not been a great place to invest for the last several years. If you look at the performance of the S%26P 500 from 1999 through 2005, you'll see that it was up about 0.2%25 compounded annual return, not much better than a money market fund. The Nasdaq 100 has fared even worse, losing 1.5%25 per year.

One popular alternative to buy and hold investing is a sector fund rotation strategy. This is often most easily done by using sector mutual funds, such as the Fidelity Select Funds family.

Here we look at a mutual fund trading system that trades the Fidelity Select Mutual Funds. We like Fidelity Select Mutual Funds for a number of reasons:

* Fidelity Select Mutual Funds have historically have shown enough persistence in their trends so that they can be held for the minimum 30 day holding period and still realize a return significantly above that of the market.

* If you are willing to hold the funds for the 30 day holding period, Fidelity allows virtually unlimited trading between the funds with no redemption fees.

* With at least 41 Fidelity Select Funds, a sector mutual fund is available for almost any stock market sector, so if there is market sector strength anywhere at a given time, there's a good chance you can capture it using Fidelity Select Funds.

* You don't need a lot of money to start. Fidelity's minimum for the Fidelity Select Funds are only $2500 per fund. Fidelity has eliminated the load on these sector funds, so there is no longer a load fee to get into them.

While there are a number of sector rotation strategies that have been published, this one is one of the simplest to actually implement. The steps are as follows.

1) Track the 22 day price change in each of the Fidelity Select Mutual Funds. (22 days is approximately one trading month).

2) Pick the Select Fund with the highest percentage gain over that time.

3) Hold that mutual fund for at least 30 calendar days, to avoid the Fidelity early redemption fee of 0.75%25.

4) After 30 days, if that Select Fund is still the top fund, continue to hold it. Otherwise, exchange it immediately for the current top ranked fund.

5) Hold the new Select Fund for 30 calendar days

For the same 7 years that the major indices have been in a holding pattern, this simple sector mutual fund system would have gained almost 200%25, or over 16%25 per year.

Now, to be fair, there is one significant weakness to this strategy. From a maximum drawdown perspective, it does almost nothing to do better than the overall markets. During the bear market of 2000 to 2002 you would have seen a drawdown almost 50%25 using this strategy. Granted, it has since come back to see new highs in 2006, but those kinds of drawdown are tough to live through.

So, does buy and hold investing in index funds really give you what you are looking for? Or would you rather have your money working harder for you? As you can see, even a simple sector rotation strategy can make your money work for you.

John Ruppel is the managing principal for Fundztrader.com. Fundztrader offers model portfolios featuring Fidelity Mutual Funds, Fidelity Select Mutual Funds, and Exchange Traded Funds. More information and a free newsletter are available at
http://www.fundztrader.com

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