Top ETF sectors of 2020

Sector performance since the start of the year: who are the winners and losers?  

The overall situation

The S&P 500 hit an all-time high earlier this month, thanks to a remarkable comeback in U.S. stocks from the March lows. While the index has pulled back since, performance is still positive on a year-to-date basis.

Tech stocks have the largest weight in the index at 27.7% of the total S&P 500 at the time of our writing. Since the start of the year, the technology sector has been sharply outperforming the rest of the market with a 26.8% gain. 

However, it would be a mistake to focus only on tech stocks, as there are other sectors that are performing well this year. In fact, six out of the eleven level 1 sectors are outperforming the main index. Among them we find consumer services, consumer discretionary, healthcare, materials and consumer staples.

The underperforming sectors include industrials, utilities, real estate, energy and financials. The worst performer is energy with a negative 43.2% on a year to date basis and a 11.7% return since 2019. Please see the table below for the a complete performance summary:

 

etfs

Ranking per sector (Source: etf.com)

 

Here’s to the winners

There are no mysteries about the reason behind the success of tech stocks. The pandemic has forced everyone to stay and work from home, which reinforced the demand for electronic equipment and software to communicate effectively, gaming consoles for at-home entertainment and e-commerce for potentially every consumption need – be it groceries, clothing or electronic devices. Companies such as Apple, PayPal, Nvidia and Microsoft could not have asked for a better growth opportunity. Such fast growth supported by solid balance sheets sent valuations to levels we have not seen since the Internet bubble.

 

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As mentioned however, tech is not the only thriving sector, and investors might want to take a broader look at the market. Consumer discretionary is the second best-performing sector this year and had the chance to benefit from the pandemic as well. One company comes to mind, especially because of the enormous wealth accumulation of its founder in the last months: Amazon. Often mistaken for a tech company, Amazon is the largest consumer discretionary stock under the Global Industry Classification Standard. The company could not have asked for better business conditions.

We sometimes think that this sector is largely made of struggling retailers, victims of the pandemic, but they actually only represent a small segment of the Consumer Discretionary Select Sector SPDR Fund (XLY). The ETF is largely composed of companies such as McDonald’s, Home Depot, Amazon and Nike. The strong retailers benefiting from a great reach did not suffer all that much, on the contrary, some benefited from the recent rebound.

Last but not least, the Consumer staples companies such as Walmart, Procter & Gamble and Costco still thrive as they sell essential goods. They even saw a remarkable sales increase when consumers panicked and were stocking up on just about everything they would need to survive a complete lockdown.

 

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Stay-at-home

The work-from-home trend greatly benefited the tech sector, while the play-from-home enchanted the communications sector. With a 12.4% year to date return, the sector is dominated by media companies who benefit from the time people spend with their eyes fixed on their screen.

Indeed, consumers have never spent so much time online. Many people spent their lockdown playing video games, streaming movies, surfing on the internet and wandering on their social media, maybe for lack of real social connections. Although ad revenues are down, companies like Google, Netflix, Google and Activision have performed very well this year.

 

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With a global pandemic touching our planet, it is not a surprise that healthcare stocks performed well too, boosted by the search for a vaccine that would solve a first world problem. The Health Care Select Sector SPDR Fund (XLV) saw a 5.1% gain this year.

 

For every winner, there must be losers

Let us start with the worst, as it is the biggest loss we’ve seen in a long time in this sector. The Energy sector dropped by an alarming 43.2%. Its first hit was taken when the oil price went into negative territory, and ships would not let go of their load for the sellers did not accept the price – yes, technically, you had to pay someone to take the oil off your hands. Since then, the sector never fully recovered, and now has an only 2.2% weighting in the S&P 500.

The financials sector also did not perform well, and for multiple reasons. First, low rates put pressure on net interest margins. A struggling economy is also expected to lead to lower loan growth. Finally, tech competitors are stealing market share from traditional financial companies.

Industrials suffered from the almost complete stop of the aerospace industry and while home prices are booming in america, commerical real estate is struggling with little to no demand for buying or renting new offices or shopfloor space. Lastly, utilities are victims of a drop in electricity demand.

 

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Sources:

https://www.investing.com/indices/us-spx-500

https://www.etf.com/sections/features-and-news/best-worst-sector-etfs-year

https://www.iea.org/reports/covid-19-impact-on-electricity

https://www.finder.com/best-etfs

 

 

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