Stocks from different sectors of the economy perform differently as the economy changes. During recessions, consumer staples, health care and utility stocks are often bought for their strong, stable business and/or dividend yields. During times when the market is flying high, technology stocks or consumer discretionary companies may rise faster than the general market.
Today we look at both Vanguard’s and State Street’s SPDR set of sector ETFs to determine how the different sectors perform in certain economic conditions and to determine which company offers the best funds for you.
The reason to invest in specific sectors of the economy can be done for a multitude of reasons; investors may be searching for greater yield, less volatility, higher risk of return or may just find specific sectors more attractive.
For whatever reason, Vanguard and State Street are both ready to serve the investing public with ETFs for each of the 9 major sectors of the stock market; consumer discretionary, consumer staples, energy, financials, health care, industrials, technology, materials, and utilities.
We will compare all 18 funds side by side and discuss the differences in the funds.
At the end we will show a few quick comparisons to show how different sectors as a whole perform under various economic conditions.
The 9 S&P 500 sectors and corresponding ETFs:
Consumer Discretionary
Consumer discretionary stocks make up about 11.5% of the S&P 500. A discretionary item is one which “optional” for the consumer. Think about items that you buy when you have a little extra money lying around, but would be cut from your budget if you lost your job tomorrow. Think $5 Starbucks trips, $40 Under Armor sweatshirts, and $500 home improvements at Home Depot. Generally consumer discretionary stocks are purchased while the economy is good and strong, as consumers have more money to spend and tend to splurge on luxury brands or optional items.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLY |
VCR |
||
| Dividend Yield |
1.17% |
1.27% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
83 |
370 |
||
The biggest difference is the number of holdings that Vanguard gives you over State Street’s. However those additional 300 companies have so little weight (literally tenths or even hundredths of a percent), can it really make a difference?
I am also including the S&P 500 performance in these charts, so you can start to feel how different industries perform during different stages of the economic cycle.
(click to enlarge)
The performance difference is not significant here, these funds have seemed to perform very close to each other. Later when comparing other sectors we will notice much larger differences in the Vanguard funds compared to the SPDRs.
In general, consumer discretionary stocks will underperform during recessions and outperform during periods of economic expansion.
Consumer Staples
Consumer Staples stocks make up about 11% of the S&P 500. These are companies that produce products that you buy no matter the economy. Think toothpaste, toilet paper and food. These businesses may not growing fast, but their income stream is dependable and not as reliant on the economy like consumer discretionary companies.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLP |
VDC |
||
| Dividend Yield |
1.89% |
2.46% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
42 |
108 |
||
Once again, Vanguard offers a much more broad representation of the consumer stapes sector, with a slightly higher yield and slightly lower expense ratio. (This is going to be a pattern for all but one set of sector ETFs).
Performance:
As you can see, the staples did not sell off nearly as bad in the 2008/2009 recession as the general market did. For this reason, consumer staples stocks are usually bought when investors are feeling nervous about the future and want “safe” investments. However, they have not performed as well so far as the consumer discretionary stocks during the economic recovery.
Energy
The energy sector makes up about 10.75% of the S&P 500. This includes your big oil names like Exxon and Chevron along with coal stocks, and alternative energy companies. These companies provide the fuel for the world to run on, and generally grow in line with the economy, but can also benefit from energy and commodity prices.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLE |
VDE |
||
| Dividend Yield |
1.78% |
1.78% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
43 |
169 |
||
Performance:
As fears of a worldwide economic slowdown and reduced future energy needs persist, energy stocks have lagged the general market. Energy stocks are also coming off of a huge boom from 2005 through 2009 (which we will see later). Their recent performance has also been due to the drop in oil and natural gas prices since the recession, which has put pressure on their bottom lines.
Financials
The financial sector makes up about 16% of the S&P 500. All aspects of the financial sector are represented here. Banking, Investment management, Lending, etc.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLF |
VFH |
||
| Dividend Yield |
1.78% |
2.21% |
||
| Expense Ratio |
0.18% |
0.19% |
||
| Number of Holdings |
81 |
521 |
||
Here, State Street undercuts Vanguard by 0.01% on the expense ratio, but lags considerably in yield. Once again Vanguard’s fund offers exposure to many more companies in the financial sector, does it pay off?
Here we see our first big difference in performance. Obviously the exposure to many more small cap financial companies in the Vanguard fund is helping increase returns (and increasing dividend yield).
Health Care
The health care sector makes up about 12.75% of the S&P 500.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLV |
VHT |
||
| Dividend Yield |
1.63% |
1.59% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
52 |
293 |
||
Like consumer staples, health care is an industry that is always in demand, no matter the economy. You can see below how the health care sector weathered the 2008/2009 downturn. Once again Vanguard with a slight outperformance over the last 5 years.
Industrials
Industrials make up about 10% of the S&P 500. This sector is the big “constructors” of the economy. Think about blue collar workers and this is the industry the work in. Examples include Boeing and the building of airplanes, CSX hauling freight down the railroads, Caterpillar construction equipment, etc.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLI |
VIS |
||
| Dividend Yield |
1.73% |
1.79% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
60 |
360 |
||
The industrial sector performance is largely dependent on the economy. When times are rough, new expensive airplanes are tough to sell, less construction equipment is needed for building and less supplies are needed shipped.
Materials
Materials makes up a small part of the overall economy, the smallest sector there is currently making up about 3.4% of the S&P 500. These are companies extracting or producing the non-energy commodities (no oil or natural gas) such as metals, paper, timber, agriculture and chemicals.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLB |
VAW |
||
| Dividend Yield |
1.67% |
1.95% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
30 |
135 |
||
Much like the industrials, this industry lags if the economy is slowing. As less and less material is consumed, these companies sell less. And also like the industrials, recovery in stock prices has been slow as worries persist about the strength of the global economic recovery.
Technology
The largest sector of the economy, making up about 22% of the S&P 500.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLK |
VGT |
||
| Dividend Yield |
1.63% |
1.39% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
78 |
415 |
||
At first glance, we can see the cost of Vanguard holding many more small cap tech companies. Few small technology companies pay dividends, and that hurts VGT’s yield.
But those small cap tech companies have also outperformed over the past 5 years, once again giving Vanguard the upper edge.
Utilities
Another small sector, Utilities make up about 3.5% of the S&P 500. You may hate seeing your electric bill every month, but these companies love it. This industry is known for its consistent earnings and strong dividends.
| Company |
State Street |
Vanguard |
||
| ETF Ticker |
XLU |
VPU |
||
| Dividend Yield |
3.28% |
3.70% |
||
| Expense Ratio |
0.18% |
0.14% |
||
| Number of Holdings |
31 |
78 |
||
Though slightly more volatile than consumer staples or health care, utilities should provide your portfolio with a relatively consistent return and decent dividend.
Conclusion
So how do all 9 sectors look together?
Over the last 5 years:
Over the last 13 years:
So why bother going over all of these sectors?
As an investor, there are times when you need your portfolio to perform different functions. As you grow older you may need less volatility in your portfolio, or demand higher yield for income during retirement. In that case, overweighting your portfolio in a sector such as health care, consumer staples or utilities may be desired.
As the stock market rallies, you may want to take some “risk” off the table and get into safer sectors to be ready for the next slow down, or you may want to jump into consumer discretionary stocks if you can handle the additional volatility in hopes for higher returns.
In general, it seems Vanguard has the upper edge in this ETF battle. Vanguard outperforms State Street’s SPDR funds in 7 of the 9 sectors (with 1 being an effective tie). Also, if you are a client of Vanguard all of these Vanguard funds trade commission free!
However, Vanguard funds also contain more small cap companies. Although your exposure is low, it still may give these funds slightly more volatility than State Street’s. This is evident in the technology sector especially, as you can see Vanguard’s fund significantly underperformed for a brief period of time during the depths of the 2009 recession.
We will be referencing these sectors often with our new “Weekly Economic Indicator Series” where we take a look at recent economic data, and break down what it means for the economy, and the stock market. Having a basic knowledge of the major sectors of the economy and how they perform in different conditions will help as you weather future boom and busts in your investing career.
