The 2 Best (and 2 Worst) Sectors to Buy Now

by Jeff Reeves | July 8, 2013 1:09 pm

ETFstock185[1]It’s been a crazy run for many stocks in 2013, with laggards like Hewlett-Packard (HPQ[2]) and Best Buy (BBY[3]) soaring back from the doldrums and innovative companies like Tesla Motors (TSLA[4]) and Netflix (NFLX[5]) disrupting their way to triple-digit gains.

But it hasn’t been fun for everyone — and when you look at the overall makeup of the market, it’s clear that there are some much bigger winners and much bigger losers despite the overall updraft since around Thanksgiving 2012.

You would think in this kind of “risk-on” environment where the market has been going like gangbusters, the winners would largely be in aggressive sectors like tech or financials. After all, these picks make up the big winners in the Dow Jones or the S&P 500.

But you’d be wrong — especially if you look at the broader Russell 3000 index, which covers six times the stocks that the S&P 500 benchmark does to offer a better snapshot of the market.

The 10 sectors of the Russell 3000 include consumer discretionary, consumer staples, energy, financials, healthcare, industrials, materials, technology, telecom and utilities. And here are the biggest winners and losers, according to research from Bespoke Investment Group[6]:

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Second-Best Sector: Healthcare

healthcare_money[8]YTD Performance: +31%

With more than 31% gains year-to-date for this Russell 3000 sector, healthcare comes in as the second-best sector so far this year.

Thanks to both stable large caps like Johnson & Johnson (JNJ[9]) as well as high-flying biotech Vanda Pharmaceuticals (VNDA[10]), healthcare stocks have managed to nearly double the returns of the broader stock market as measured by the 15% gains in the broader S&P 500 and 16% in the Dow Jones year-to-date.

Healthcare has many appealing factors for investors. It’s a recession-proof sector, since people still get sick and the demographic push of aging baby boomers[11] is creating many more “customers” for the industry.

Ways to play this broader sector include exchange-traded funds like the iShares Dow Jones US Healthcare (IYH[12]) and iShares Nasdaq Biotechnology Index Fund (IBB[13]).

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Second-Worst Sector: Utilities

electrical outlet 630[14]YTD Performance: +10%

All that hunger for yield that we saw a year or two ago has seemed to fall by the wayside as hot utility stocks have dramatically underperformed this year. Returns for this segment of Russell 3000 stocks average just about 10%.

Larger players like Exelon (EXC[15]) and Duke Energy (DUK[16]) are flat at best, and smaller regional players like Wisconsin Energy Corp (WEC[17]) have significantly underperformed in 2013 — even when you bake in dividends that range as high as 4.6%.

The utility sector saw a huge run across 2011 and early 2012, but investors clearly have moved on to other opportunities in 2013. That trend will likely only continue, especially now that interest rates might be on the rise and yield is available elsewhere.

Still, those hoping for a bounceback can play utilities through funds like the Utilities SPDR (XLU[18]) or the Guggenheim S&P 500 Equal Weight Utilities ETF (RYU[19]).

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Best Sector: Consumer Discretionary

Retail Shopping[20]YTD Performance: +32%

Retail stocks have been an area of surprise strength in 2013, with the Russell 3000 logging almost 32% returns for the sector since Jan. 1.

Small-cap Stein Mart (SMRT[21]) is among the Russell 3000’s biggest winners. Stein Mart, a $600 million retailer of apparel, is up over 80% year to date.

The big guys have also done well, however, and it’s across all areas of the discretionary spending spectrum. Teen clothing king Gap Inc. (GPS[22]) is up 40% so far this year, automaker Ford (F[23]) is up 30% and appliance and electronics retailer H.H. Gregg (HGG[24]) has soared by more than triple digits.

If you’re looking to play a rebound in spending and a broader cyclical recovery, clearly discretionary plays are the way to go. Funds in the space include the Vanguard Consumer Discretionary ETF (VCR[25]) and the Consumer Discretionary SPDR (XLY[26]).

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Worst Sector: Materials

Coal[27]YTD Performance: +6%

With a strong dollar holding back commodity prices and China’s economy suffering a manufacturing slowdown[28], it hasn’t been fun to be a materials stock in 2013.

Base metals giant Southern Copper (SCCO[29]) and coal king Peabody Energy (BTU[30]) are both off a respective 30% and 40% year-to-date as a result of slumping demand and soft prices. Just about every other commodity stock in the materials sector is feeling the pain, too.

This isn’t likely to change anytime soon. What with the talk of tapering at the Fed and monetary policy that is likely to tighten, the greenback probably won’t be weakening and pushing up the cost of dollar-denominated materials like steel, aluminum, coal and copper.

Also, China continues to suck wind — and while a growth rate over 7% is certainly enviable, the expectations for higher growth and the lack of demand elsewhere will continue to punish materials stocks in 2013.

That could mean continued ugly results for funds like the Materials SPDR (XLB[31]) and iShares Dow Jones U.S. Basic Materials (IYM[32]).

Jeff Reeves[33] is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[34] Write him at[35] or follow him on Twitter via @JeffReevesIP[36]. As of this writing, he did not own a position in any of the stocks named here.

  1. [Image]:
  2. HPQ:
  3. BBY:
  4. TSLA:
  5. NFLX:
  6. Bespoke Investment Group:
  7. Compare Brokers:
  8. [Image]:
  9. JNJ:
  10. VNDA:
  11. demographic push of aging baby boomers:
  12. IYH:
  13. IBB:
  14. [Image]:
  15. EXC:
  16. DUK:
  17. WEC:
  18. XLU:
  19. RYU:
  20. [Image]:
  21. SMRT:
  22. GPS:
  23. F:
  24. HGG:
  25. VCR:
  26. XLY:
  27. [Image]:
  28. China’s economy suffering a manufacturing slowdown:
  29. SCCO:
  30. BTU:
  31. XLB:
  32. IYM:
  33. Jeff Reeves:
  34. “The Frugal Investor’s Guide to Finding Great Stocks.”:
  36. @JeffReevesIP:

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