The Categorization of Stock Funds

Stock funds are classified by the types of companies whose stock they own, the range of the companies' market capitalizations, their geographic area of coverage and the investing style employed by the funds' managers. Stock funds range in scope from very broad to very narrow, thus providing another factor in their classification.

The extended stock fund style box below is a means of classifying stock funds by three primary criteria: market capitalization, investing style and geography.

The broadly diversified stock mutual funds are mainly distinguished by their management styles and the range of their market capitalizations. Some of these stock funds fit nicely into one of the four market capitalization brackets: large, mid, small and micro. But many of them span one bracket and part of an adjacent bracket, span most of two brackets, or straddle two brackets. So you will find combinations such as: large-cap plus some of the larger mid-caps; large-cap plus mid-cap; small mid-cap plus large small-cap, etc. To understand the true market capitalization span of a particular stock fund, you need to look in the prospectus to find out what the range of the market caps of the fund's holdings span and also the distribution, i.e., the range within which the majority of the fund's holdings falls. Don't let a few outliers overrule the majority.

Now, just because many stock funds don't fit neatly into the four market capitalization brackets doesn't mean that the four brackets are not a viable criteria for classification. You just need to remember that the boundaries are not really carved in stone and that each stock fund needs to be evaluated on the basis of the bulk of its holdings. One man's large mid-cap may be another man's large-cap. I, for instance, have an affinity for small-cap value mutual funds and tend to consider any company larger than the middle of the mid-cap bracket as being a large-cap company. So, to me, a stock fund invested in large-caps and the upper half of the mid-caps is a large-cap stock fund. To you, it may be something else.

Sector mutual funds, also known as specialty mutual funds, cover a wide array of market and industry segments. Some are quite broad, like technology funds, and some are very narrow, like semiconductor funds. With 86 major industry groups in the 10 SIC (Standard Industry Classification) divisions, and scores of subdivisions within the groups, the possibilities for sector funds include just about anything you could ask for.

Some sector funds are so broad that they include a whole division, like Transportation. Some are a little narrower and include multiple groups within a division. Some include only one of the 86 groups. And some are so narrow that they only include one subdivision of a group, like semiconductors. Of course, funds also can aggregate related groups in multiple divisions, which is what general technology funds do.

Consider Intel and Microsoft. They're both large-cap technology firms that would fit in most any technology fund, which would be a sector fund. Given their size, notoriety and market dominance, they could just as easily be a component of any broadly diversified large-cap stock fund. However, they are in entirely different businesses, semiconductors and software, respectively, which would make them candidates for industry-specific stock funds. Indeed, you will find stock mutual funds that specialize in semiconductors and you will also find there are stock mutual funds that specialize in software.

With so many sectors to choose from, anyone classifying sector funds usually groups them in six to twelve major sectors, regardless of how narrow the scope of any single fund may be. Some of the most popular major sectors are: biotechnology, energy, financial services, health care, natural resources, precious metals, real estate, technology, telecommunications and utilities. Socially responsible mutual funds, which have been around for quite a while, are suddenly becoming popular and some of them have very good performance records. Green mutual funds, which are relatively new, are a subset of socially responsible funds. Alternative energy funds, also new to the scene, may be found with the socially responsible funds, the green funds or the energy funds.

In some listings, you will find biotechnology with health or technology. This is an example of a sector that is fairly narrow and therefore may be listed under a broader category. If you don't see what you're looking for at the top level, dig a little deeper and you'll probably find it, although you might not find it where you think it logically belongs.

Until very recently, energy has usually been included with natural resources, and that might still be appropriate given that there are many stock funds that include both in their portfolios. However, with the spotlight now on energy, there are some pure plays becoming available. If you don't see a major sector named Energy, look under natural resources.

There should always be a real estate sector listed. It's a very important asset class that differs significantly from all other types of stock. REIT funds, a subset of the real estate sector, provide a substantial stream of income and, for this reason, are often treated as fixed-income investments. However they are stocks, not bonds, and should be listed with stock sector funds.

Finally, there are stock index mutual funds that track all the major stock indexes of the world, including some sectors such as technology and real estate. As a rule, index funds should be listed in the category whose funds most closely resemble the index. For example: An S&P 500 index fund belongs with the domestic large-cap stock funds. However, you may find all of the various index funds listed as their own group as a matter of convenience, which is fine.

Detailed descriptions of the various types of stock funds can be accessed via text links from the list of Types of Mutual Funds.

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