Mutual funds specialize in just about every sector of the economy that one can imagine. With that in mind, it's no surprise that a growing number of funds invest in fun! From world travel and cable television to gambling and alcohol, if it involves ways to spend your discretionary income, there might be a mutual fund or exchange-traded fund (ETF) looking for ways to invest in the idea. Read on to find out how fund managers invest in these funds.

Tutorial: Mutual Funds

What the Fund Managers Buy
The leisure sector expands on the idea of sin funds. Sin funds often limit their scope to alcohol, tobacco, firearms and other potentially controversial topics, whereas leisure funds expand this scope to maintain a measure of diversification, seeking to invest in areas where consumers focus their nonessential spending.

Entertainment, travel, luxury goods and even common items, such as fast food restaurants, newspapers and magazines can fit into a leisure or luxury portfolio. Jewelry from Tiffany and burgers from McDonald's (NYSE:MCD) could sit right beside Coach handbags and Hilton hotels on the list of items that fund managers are tracking. (Find out how everyday items can affect your investments in Commodities That Move The Markets.)

Big Players, Niche Market
The market for these portfolios is dominated by a small number of big players, including mutual fund giants Fidelity and AIM, as well as Invesco, Rydex and PowerShares. These giants are seeking to tap into a broad range of opportunities in the global marketplace.

In the U.S., consumers have an appetite for Hummers and cruises. The emerging middle class in China is buying automobiles and engaging in international travel. In Russia, the nouveau riche are sipping champagne and eating caviar. Whoever they are and wherever they are, consumers are spending money on more than just the basics, and corporations are profiting from their purchases. (Read about American tastes in McMansion: A Closer Look At The Big House Trend, and about changes in Chinese class structure in What Determines Gas Prices?)

To make money in the leisure and luxury market, fund managers favor two approaches:

Active management approach
This approach lets the fund managers buy and sell at will, looking for the best places to invest regardless of where they are, what they are, or what they do to make money.

The following are the pros and cons to this methodology:

Index investing approach
This approach offers a more passive methodology. In the leisure market, the indexes are proprietary. Instead of tracking an industry bellwether, such as the Dow Jones Industrial Average (DJIA) or the Standard & Poor's 500 Index (S&P), the fund managers develop their own indexes, dividing the portfolio among various industries. A specific percentage of assets might be dedicated to hotels, resorts and cruise lines, while another percentage is dedicated to casinos and gaming, another to movies and entertainment and another to restaurants.

After the percentages are chosen and an asset allocation model is created, the portfolio is invested to match the model. If the model consists of ten categories and calls for 10% to each category, the money is invested accordingly. If a specific sector is outperforming all others (or is losing money), the portfolio manager still adheres to the model. (The Lowdown On Index Funds provides a closer look at a strategy based on the idea that, if you can't beat the market, why not join it?)

The Future of Fun
Leisure and luxury are always in demand. Although not everyone will drive a Bentley or book a penthouse suite at the Ritz, most of us can scrape together enough cash to drink an exotic microbrew, indulge in a special perfume, splurge on a luxury handbag or simply eat at a fast-food restaurant.

While the lower end of the luxury scale can seem mundane to those living in developed nations, the opening of fast-food outlets in emerging-market countries is a big deal to those global citizens getting their first taste of what many think of as "the good life." (For the basics of emerging markets, read What Is An Emerging Market Economy? For an example of one way a country's internal changes can impact the global market, read What Determines Gas Prices?)

While economic cycles come and go, and the lower end of the leisure market suffers from people having less money for fun when times are tough, the pursuit of a good time and the good life are universal goals. As globalization continues to spread capitalism around the world, the appetite for luxury goods and entertainment is almost certainly going to expand and not going to disappear. As long as consumer demand creates a market for fun, fund managers will find a way to invest in it.

For tips on enjoying a little of the high life without blowing your budget, read Globetrotting On A Budget and Seven Saving Tips For Summer Getaways.

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