Break the most profita

The stock market has its ups and downs, with a general collective upward trend over the long term. Every investor hopes to be able to identify future 10-baggers and 100-baggers before they really take off so they can beat the market, but identifying these stocks in their early stages is difficult because there are usually a lot of competitors promising the same future. and yet are destined to fall flat.

Then there are macroeconomic factors to consider. Growth stocks have a high speculative component to their valuations, so they tend to do well when the economy is booming and poorly during times of economic hardship and high inflation. Meanwhile, value stocks are more stable through the business cycle because most of their valuations come from real earnings and growth. Some sectors, such as consumer staples and real estate, are known to hold their value well over the long term even when the rest of the stock market suffers.

Making bets on specific sectors based on macroeconomic factors can seem like an intuitive part of value investing because of the principle of buy low and sell high. However, some well-known value investors dismiss market timing as speculation, preferring to focus on company fundamentals and long-term growth prospects rather than macroeconomics.

Although betting on specific sectors can help protect short-term capital, market timing has historically proven to be a difficult undertaking. It’s impossible to tell in advance when a bear market will end and the next bull market will begin, which means holding exclusively defensive stocks can lead some investors to underperform if they can’t accurately predict when. the market will make a turn for the better.

Would it then be better for investors to focus on company fundamentals instead of focusing on specific sectors based on the macro situation? There’s no way to know what the future holds, but let’s take a look at how specific sectors have compared to the S&P 500 over the past decade to see if we can spot any trends.

The most profitable sectors of the last decade

Over the past decade, the S&P 500 ETF Trust (TO SPY, Financial), an exchange-traded fund that tracks the S&P 500 Index, had an annualized return of 12.02%. Here’s how the 10-year annualized ETF returns for the 11 individual sectors in the index stack up, ranked from highest to lowest.

Technology Select Sector SPDR ETF (XLK, financial) ETF – 16.91%

Healthcare Select Sector SPDR (XLV, financial) ETF – 13.75%

Consumer Discretionary SPDR (XLY, financial) ETF – 13.33%

Financial Sector Select SPDR (XLF, financial) ETF – 11.51%

SPDR Select Industrial Sector (XLI, financial) ETF – 11.10%

Utilities Select Sector SPDR ETF (XLU, financial) ETF – 9.91%

Consumer Staples Select Sector SPDR (XLP, financial) ETF – 9.37%

Materials Select sector SPDR (XLB, financial) ETF – 9.06%

The Energy Select Sector SPDR Fund (XLE, financial) ETF – 4.75%

So we can see that over the last 10 years, S&P 500 technology stocks have been the best performers, followed by health care and consumer discretionary. These three sector ETFs were the only ones to outperform the index as a whole, which is not surprising given that the S&P 500 is weighted by market capitalization, so the main stocks have an outsized effect on results. global.

The worst performers of the decade were energy, materials and consumer staples, although materials and consumer staples weren’t that far behind the middle of the pack in terms of percentage gains annualized. With an annualized return of 4.75% over 10 years, energy was by far the worst performer. Energy and Materials are highly cyclical, although Materials is on a general upward trend due to growing global demand for building materials and technologies. Even though the consumer staples sector is known to be safer than most sectors in the event of a sell-off, it still isn’t exciting enough in a bull market to attract much attention.

The results above exclude the Real Estate Select Sector SPDR fund (XLRE, financial) ETF and the SPDR fund of the communication services sector (XLC, Financial) ETF, as these are new additions to the S&P 500 sector lineup and do not yet have as much history as the others. The Real Estate Select Sector ETF SPDR Fund, which launched in October 2015, has a five-year annualized return of 5.85%, while the Communication Services Select Sector ETF SPDR Fund launched in June 2018 and has achieved a three-year annualized return of 1.48%.

Results from 1999 to present

For the next part of this study, we will zoom back on the creation of this group of sector-based S&P 500 ETFs, measuring their annualized earnings from the date of inception on December 16, 1998 until today (nearly 24 year). For comparison, the SPY ETF recorded an annualized gain of 14.64% for this period.

Consumer Discretionary SPDR (XLY, financial) ETF – 25.97%

The Energy Select Sector SPDR Fund (XLE, financial) ETF – 22.36%

Healthcare Select Sector SPDR (XLV, financial) ETF – 24.54%

Materials Select sector SPDR (XLB, financial) ETF – 19.38%

SPDR Select Industrial Sector (XLI, financial) ETF – 19.06%

Technology Select Sector SPDR ETF (XLK, financial) ETF – 16.36%

Utilities Select Sector SPDR ETF (XLU, financial) ETF – 15.95%

Consumer Staples Select Sector SPDR (XLP, financial) ETF – 13.86%

Financial Sector Select SPDR (XLF, financial) ETF – 6.67%

Here, the Consumer Discretionary, Energy, Healthcare, Materials and Industrials sectors all outperformed Technology, largely due to the date range that captured the bulk of the dot-com crash, while even S&P 500 tech stocks that would continue to become long-term winners like Apple Inc. (AAPL, Financial) recorded significant losses.

What’s really remarkable about these numbers is that there were only two sector ETFs that underperformed the SPY ETF: consumer staples and financials. Consumer Staples results hardly underperformed, with the real detractor being the Financials sector.

Why has the financial sector been so hard hit by the results? Why didn’t the performance of other sectors compensate for this? The answer lies in the financial crisis. Financial stocks in the S&P 500 were hit hard during the financial crisis, the most notable being Lehman Brothers, which was removed from the index in 2008 after its bankruptcy, triggering a global liquidity crisis. Since the financial crisis, banks have become safer but less profitable.

One last thing I should note here is that, as you may have noticed, the gains of these ETFs are greater than those of the S&P 500 index itself. In particular, the SPY ETF has outperformed the S&P 500 since its inception. This is because ETFs are traded like stocks while indices are not, so there may be a difference between the value of an index and what the market is willing to pay for an ETF that tracks it. The chart below shows how the valuation gap between the SPY ETF and the S&P 500 index has narrowed over time:

Identify patterns

The chart below shows how the different S&P 500 sector ETFs have evolved over time. Have the winners and losers remained constant over time or have they changed over the long term? What are the short-term patterns?


The biggest long-term change comes from the energy sector (the XLE ETF, represented in the chart above by the blue line). The global energy situation is constantly changing. Energy is the lifeblood of developed civilizations, and since most of us are still dependent on non-renewable sources of energy, there is a lot of politics at play here depending on where the greatest reserves of oil and gas as well as nations that will start operating. off the reserves first.

Next is the technology sector (the XLK ETF, represented by the light green line). This sector had its ups and downs from 1998 to 2001 around the dotcom bubble and has been gaining ground rapidly since then. The XLK ETF only recovered from the dot-com crash in 2017, but since then it has exploded, with most of the growth occurring after the 2018 correction.

The Consumer Discretionary sector (ETF XLY, represented by the orange line) remained overwhelmingly the best performer, with the exception of Energy during the shale oil boom. Restaurants, e-commerce businesses, automotive aftermarket retailers, entertainment companies, and home builders all fall into this category. Discretionary consumer spending flourishes when average household disposable income increases.

The financial sector (the XLF ETF, represented by the dark green line) went from the fourth-worst pre-financial crisis to the worst performance by far afterwards, remaining at an all-time low.


Overall, it is clear that some sectors have performed better than others over the past 20+ years. While most S&P 500 sector ETFs have performed consistently outside of general market crashes, there have been a few notable exceptions whose price patterns have changed over the long term, such as the energy, technology and finance.

There are two main takeaways from this information. On the one hand, the best performing sectors generally maintained their status, while the worst performing sectors did the same. Even if a specific sector looks undervalued in the short term, it may continue to underperform if it has in the past. Second, there have been significant long-term industry shifts in the past, so investors cannot rule out the possibility of further long-term shifts in the future.

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