Understanding Sector Weight & Mutual Fund Diversification

Sector weight and diversity within a mutual fund really are based on economics. The major goal of most mutual funds is to match or beat the investment returns of the major market indices, such as the S&P 500.

Imagine, 500 companies within an index. All the industries comprising the index will have changing weightings depending upon the growth or decline of the companies. Does the price index reflect the economy, or does the economy affect the index? Both reflect each other.

A money manager understands the nature of the economy and how, like the index, it changes with size and weightings in each industry. A money manager also understands what a prototype economy would be like given the time and direction of the economic cycle as well as exogenous and extraneous factors upon the economy, like war and geopolitics.

With that said, there is no one root determinant for the sector weightings. It is a matter of survival in the economic landscape. For example, newspaper and media could hardly survive the last couple of years. This made the sector weightings for funds capsize, only to be met with a new cycle. This happens to all industries at some time or another during their histories.