DEFINITION of 'Sector Fund'

A stock mutual, exchange-traded or closed-end fund that invests solely in businesses that operate in a particular industry or sector of the economy. Because the holdings of this type of fund are in the same industry, there is an inherent lack of diversification associated with these funds.

BREAKING DOWN 'Sector Fund'

These funds tend to increase substantially in price when there is an increased demand for the product or service offering provided by the businesses in which the funds invest. On the other hand, if there is a downturn in the specific sector in which a sector fund invests, the fund will often face heavy losses as a result of the lack of diversification in its holdings.

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