I recently read a column that claimed to list 10 top funds that most 401(k)s don't offer. Yet when I looked closer, I noticed it was looking at the best-performing stock funds from July. In other words, the funds listed excelled just over one particular month.
Be careful with that. One month is not enough on which to conclude anything. One fund might have done well with astute investment decisions by its management team, while another might be on the list because of blind luck. Even a single year's performance isn't really conclusive. Many stocks have one unusually strong year, only to follow it with lackluster results. (That can happen sometimes because the strong results attract so much new money that the managers can't find enough good places to put it.)
Here are some of the funds that made the list:
ProFunds Biotechnology UltraSector ProFund (BIPIX). When I looked it up, I was pleased to see no sales load and Hratch Najarian, an Armenian-American manager. (What can I say? We Armenian-Americans notice each other.) Its five-year average annual return of 11.7% beat the market, but its expense ratio, at 1.56%, is a little on the steep side. It's also 150% leveraged, meaning that it's set up to have its gains (or losses) magnified. Its top holdings recently included Imclone Systems
(NASDAQ:IMCL), Savient Pharmaceuticals (NASDAQ:SVNT), and Biogen Idec (NASDAQ:BIIB).
ProFunds Banks UltraSector ProFund (BKPIX). This is another fund run by Najarian, with a similar expense ratio, but a very different five-year average return -- a loss, actually, of nearly 10%. Its top holdings recently included Wachovia
(NYSE:WB), Bank of America (NYSE:BAC), and Zions Bancorp (NASDAQ:ZION).
Notice anything about them? Right -- they're both focused on a particular industry. For that reason, many 401(k) plans won't offer them as an option; they prefer instead to offer broader-based funds.
It can be risky putting a lot of your money on one industry -- just look at banking, as an example. Sector funds routinely show up at both the top and the bottom of short-term performance listings.
But sector funds can make sense if you really believe in a particular industry's future but don't want to limit yourself to one or two stocks in it. For instance, if you think solar energy will thrive but don't want to bet the farm on a particular stock like First Solar
Nevertheless, with the rise of sector-based ETFs, you can find more promising funds out there with lower fees -- some of which may actually be offered within your 401(k). So don't feel bad about missing out on these picks.
If you'd like some pointers to a bunch of outstanding mutual funds, give our Motley Fool Champion Funds newsletter services a whirl -- it's free with a 30-day trial.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Bank of America is a Motley Fool Income Investor pick. Biogen Idec is a Motley Fool Stock Advisor recommendation. Try our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.