Top Performing Sector ETFs

March 13, 2018

High-Yielding Sectors Lag

Sharply contrasting with tech’s dominant performance are five others sectors that are in the red for 2018, falling far behind the broader market this year.

The Vanguard Telecommunication Services ETF (VOX) is down 1.7%; the Vanguard Consumer Staples ETF (VDC) is down 3.7%; the Vanguard Energy ETF (VDE) is down 5.4%; the Vanguard Utilities ETF (VPU) is down 6.4%; and the Vanguard Real Estate ETF (VNQ) is down 8.9%.

While clearly a disparate group, all of these sectors share one important commonality: They yield much more than the overall stock market. The S&P 500 currently yields about 1.87%, while the five aforementioned sector ETFs have yields between 2.6% and 3.8%.

With rising interest rate and inflation worries front and center for investors, it’s not surprising these high-yielding sectors have fallen out of favor. The U.S. 10-year Treasury yield briefly hit 2.95% last month, the steepest level in four years.

With Treasury yields climbing, there’s been less incentive for income investors to reach for yield in sectors like utilities and real estate.

“The utility market has been very much moving in lockstep with the 10-year Treasury,” said John Bartlett, portfolio manager and utility analyst for Reaves Asset Management.

At the same time, Matt Kopsky, REIT analyst at Edward Jones, said that, in the near term, “it’s all about interest rates” when it comes to real estate stocks, while adding they will “likely underperform if the 10-year yield continues moving higher to 3%-plus.”

Trade Worries

Interest rates haven’t been the only thing causing investors to be jittery recently. All the talk of about trade wars has weighed on industrials and materials stocks.

The Vanguard Industrials ETF (VIS) and the Vanguard Materials ETF (VAW) are up both up year-to-date—by 2.8% and 1.3%, respectively—but that’s less than the market return.

Some investors fear that the steel and aluminum tariffs enacted by the U.S. last week could hurt companies in these sectors, which are big exporters and consumers of raw materials.

On the other hand, sectors like consumer discretionary, financials and health care have largely been insulated from investors’ trepidation about trade. These sectors, which have a greater focus on the domestic economy, are all up more than the overall stock market.

The Vanguard Consumer Discretionary ETF (VCR) is up 6.7%; the Vanguard Financials ETF (VFH) is up 6.3%; and the Vanguard Health Care ETF (VHT) is up 5.8%.

Rising interest rates also haven’t been much of a worry for these sectors, which all yield less than the S&P 500. Indeed, higher rates can actually be a benefit for the financial companies like banks, which can charge more for the loans they make.

Follow Sumit Roy on Twitter @sumitroy2

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