With the final quarter of the year just a couple of weeks away, it’s time for some sector rebalancing if you hope to set your portfolio up for a strong finish to what has been a pretty great year for U.S. equities.
Markets are at all-time highs after the Federal Reserve stood pat on it’s bond-buying program. For the year-to-date, the benchmark S&P 500 is up 21% on a price basis through Sept. 19. Add in dividends, and the broader market’s total return comes to 23% for the year so far.
Any investor indexed to the S&P 500 has to be happy — unless, of course, they missed out on even more upside by failing to overweight the hottest sectors.
After all, within the S&P 500, the healthcare sector leads all comers with a total return of 32% for the year-to-date. On the other side of the ledger sits the telecommunications sector, with a total return of 9.3%.
If you’re looking to rebalance your tactical allocation to close out the year, sector funds (be they mutual funds or ETFs) offer the best way to place diversified, relatively inexpensive sector bets. With that in mind, here are the three sectors you should pile into for year-end — and the best sector funds to do so.
Consumer Discretionary Sector Funds
We expect that outperformance to continue. Consumers are carrying much less debt on their personal balance sheets, the housing and jobs markets are improving and auto sales are booming (witness the power of pent-up demand.) And, of course, we’ve got the holiday shopping season just around the corner.
Top Sector ETF — Vanguard Consumer Discretionary ETF (VCR): Top holdings include Comcast (CMCSA) and Home Depot (HD) and Amazon (AMZN), and the expense ratio of 0.14% can’t be beat. Sure, you could buy the equivalent mutual index fund — Vanguard Consumer Discretionary Index Fund Admiral Shares (VCDAX) — but the minimum investment is $100,000.
Top Sector Mutual Fund — Fidelity Select Consumer Discretionary Fund (FSCPX): Top holdings include Comcast and Disney (DIS), it’s crushing its benchmark for the year-to-date, and expenses of 0.84% is a bargain price for active management.
Information Technology Sector Funds
Tech has been a big disappointment in 2013. The sector has generated a total return of 15%, lagging the S&P 500 by 8 painful percentage points. But there is hope for a strong finish into the end of the year and beyond.
Like consumer discretionary stocks, there’s a lot of pent-up demand, as corporations have put off business investment in infotech. That’s starting to change, as companies need greater efficiency to enjoy record-high margins. Cash-rich balance sheets also bode well for dividends and mergers and acquisitions.
Top Sector ETF — Vanguard Information Technology ETF (VGT): Another way to get cheap exposure to the “Admiral” share class of an excellent Vanguard fund. Top holdings include Apple (AAPL) and Google (GOOG), and the price is right. Expenses come to just 0.14%.
Top Sector Mutual Fund — ProFunds Internet UltraSector (INPSX): Top holdings also include Apple and Google, as well as eBay (EBAY) and Priceline.com (PCLN). Expenses of 2.84% would ordinarily make this fund a non-starter, but active management is more than earning it keeps. The fund is beating the S&P 500 by 34 percentage points for the year-to-date.
Industrials Sector Funds
Now that Europe has emerged from recession and we’re getting signs of a pick up in Asia, industrials should have some wind at their backs.
Top Sector Mutual Fund — Fidelity Select Industrials Fund (FCYIX): Top holdings include Danaher (DHR) and Union Pacific (UNP). Like other Fidelity sector funds, it’s killing its benchmark this year and expenses of 0.84% are more than reasonable for an actively managed fund.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.