Financial Services Mutual Funds

Financial Services mutual funds are broadly diversified across the financial services industry. Sometimes you'll find this sector listed as Financial Services and Banking, as many of these mutual funds have substantial holdings in the Banking subsector.

Financial Services funds invest in the stocks of companies that are providers of financial services or provide services, such as software development, to such companies. Companies that provide financial services can be divided into a number of subsectors, including: Brokerage, Insurance, Consumer Credit, Commercial Credit, Employee Benefits, Tax Preparation, Banking, Mortgage and Mortgage Guarantee. Some Financial Services funds are diversified and others are narrow in scope, covering only one or two of the subsectors such as Banking, Insurance or Brokerage.

From 1998 through 2007, this sector was slightly more volatile than the general market yet the category's long-term average returns are somewhat less than the general market. However, some of the mutual funds in this sector outperformed the market by a small margin, all-be-it with slightly higher volatility.

The sector is highly correlated with the S&P 500, thus it has little potential for diversifying your portfolio. Also, this sector is well represented in the diversified large- and mid-cap categories. So, if your portfolio has a solid core of large- and mid-cap funds, adding one or more Financial Services mutual funds would lead to over-weighting this sector. With its lackluster performance and lack of diversification potential, there is no good reason to over-weight this sector unless you have a burning desire to do so for some personal reason.

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