Best & Worst Sector ETFs Of The Year

A stunning comeback for U.S. stocks pushed the S&P 500 to all-time highs earlier this month, led by an even bigger rally in technology shares. The S&P 500 topped its previous record from February, rising as high as 3,580 on Sept. 2.

The index has pulled back some since then, but it’s still up a solid 6.3% on a year to date basis. Tech stocks, as measured by the Technology Select Sector SPDR Fund (XLK), are up a cool 26.8% in the same period.

Tech is far and away the best-performing sector in 2020, and its position as the largest sector within the S&P 500, with a weighting of 27.7%, has done a lot to bring the broader index back from the depths of the coronavirus sell-off.

Still, tech isn’t the only sector performing well this year; six of the 11 stock market sectors are beating the S&P 500 this year, including consumer discretionary, consumer services, materials, health care and consumer staples.

On the flip side, industrials, real estate, utilities, financials and energy—all sectors in the red—are underperforming the market so far this year. Energy was the worst-performing sector of 2019 also, as can be seen from the table below:

YTD & 2019 Sector Returns

Data measures total returns for the year to date period through Sept. 14, 2020

Bullish Trends

By now, most investors are well aware of the factors driving the tech sector higher. Apple, Microsoft, Nvidia and PayPal have benefited from work-from-home, gaming and e-commerce trends that have accelerated due to the pandemic. Tech’s fast growth and strong balance sheets have been coveted in the uncertain environment, sending valuations to levels not seen in two decades.

Meanwhile, consumer discretionary, the second-best-performing sector of the year, has benefited from similar tail winds as tech this year. Indeed, Amazon—the largest consumer discretionary stock under the Global Industry Classification Standard (GICS)—is often thought of as a technology company (the same goes for Alphabet and Facebook, which are classified as communication services stocks under GICS, but are widely thought of as tech companies).

The consumer discretionary sector sometimes evokes images of struggling brick-and-mortar retailers—the type of companies suffering the most from COVID.

But those stocks make up only a small fraction of the Consumer Discretionary Select Sector SPDR Fund (XLY). Rather, the ETF is dominated by the likes of Amazon, Home Depot, McDonald’s, Nike and Lowe’s—strong retailers that, in many cases, are benefiting from the current environment both online and offline.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Less surprising than consumer discretionary’s outperformance is this year’s strength in consumer staples.

These are the type of stocks that typically thrive in uncertainty. Consumer staples companies like Procter & Gamble, Walmart, Mondelez and Costco sell what are typically thought of as essentials, and they were even more essential during the worst of the pandemic, when consumers were frantically stocking up on basic household goods.

Play From Home

If the tech sector is thought of as a “work from home” beneficiary, the communication services sector can be thought of as a “play from home” beneficiary. The sector—up double digits this year—is dominated by media companies that have been relatively insulated from the coronavirus pandemic.

Ad revenues are definitely down, but consumers are spending more time than ever online. Search, social media, streaming and gaming companies are well-positioned to thrive going forward, which may be why companies like Google, Facebook, Netflix and Activision have done so well this year.

Also performing well this year are health care stocks. Already benefiting from demographic factors, health care got a shot in the arm from this year’s search for coronavirus treatments and vaccines. The Health Care Select Sector SPDR Fund (XLV) was last trading with a 5.1% gain for the year.

Underperformers

On the other side of the ledger are five sectors in the red, the worst of which is energy. Down a whopping 43.2%, energy was clobbered when oil prices briefly fell into negative territory, and hasn’t recovered much from those lows. The sector is now the smallest among S&P 500 sectors, with a tiny 2.2% weighting.

Financials, the only other sector with a double-digit loss, has underperformed for several reasons. Low rates have pressured margins for many financial firms; loan losses are picking up due to the poor economy; and tech competitors are eating into the markets where many traditional financial companies reside.

Industrials, real estate and utilities round out the worst-performing sectors this year. In the case of industrials, heavy exposure to aerospace companies is certainly hurting; real estate is getting pressured by the dismal outlook for office and retail REITs; and utilities are being weighed down by slipping electricity demand.

Email Sumit Roy at [email protected] or follow him on Twitter @sumitroy2