Which S&P Sectors Are Best for Investing?

ETFs that track the S&P 500 are popular ways to invest. Over the last decade or more these ETFs have routinely outperformed managed investment funds. Standard and Poors offers more investment opportunities than the S&P 500 which tracks the 500 biggest US companies. There are eleven S&P sectors with the largest by market cap being information technology. Which S&P sectors are best for investing over the long term and which ones may be better choices as the market declines farther and farther?

Which Are the S&P Sectors?

Starting with the largest based on market capitalization the eleven S&P market sectors are as follows:

Information Technology
Health Care
Consumer Discretionary
Communication Services
Consumer Staples
Real Estate

If you are wondering which S&P sectors are best for investing, consider this. Since the beginning of the year the S&P 500 has fallen 14%. The information technology sector has fallen by 20%. Meanwhile, the Consumer Staples sector has only fallen by 5% and in Mid-April was up by 3%. By selecting one of the S&P sectors as a guide when choosing an ETF, an investor can focus on sector-related factors as opposed to the strength of the US economy. Because the big tech names are such a huge part of the S&P 500, they tend to overshadow sectors like energy, utilities, real estate, materials, industrials or consumer staples.

Which S&P Sectors Are Best for Investing?

Why Should You Invest in S&P Sectors?

As The Balance writes, it is possible to beat the market (S&P 500) with individual sector funds. In late 2021 they recommended the health care, information technology, and consumer discretionary sectors as likely to outperform the larger market as represented by the S&P 500. They argue that an aging population and a host of new biotech advances make investment in this sector attractive for the long term. This sector includes drug makers, makers of medical instruments, biomedical companies, insurance companies, and hospital conglomerates. Although the story for investing in this sector via an ETF sounds good, the sector peaked in February of 2021 and now has fallen by more than half by June of 2022. Information technology as a sector has outperformed the S&P 500 over the last five years. This should not be a big surprise as the tech giants have been the main drivers of the market for years. It should also not be a surprise that the Vanguard ETF that follows this sector has fallen by 37% year to date as opposed to the S&P 500 falling 15%.

Investing in individual sectors allows you to benefit from specific trends that are unique to that sector. For example, when it became apparent late in 2021 that the Fed was going to raise interest rates and the market was likely to fall a practical response would have been to rotate out of a sector like information technology and into a sector like consumer staples. The difference would have been between an investment that has essentially held its ground versus an investment that lost about 30%. When the economy starts to recover rotating back into information technology will make sense as these companies will be the engines that drive the economy for years to come.

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