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Best Performing Sector ETFs Of The Year

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In a year in which the S&P 500 has surged as much as it has, it’s tough to find a group of stocks that has done poorly.

Sure, there are pockets of weakness, such as in the ARK Innovation ETF (ARKK), which is down 23% year-to-date. But if you look at the big, broad indices and the major sectors that lie beneath them, there is no weakness to speak of.

That’s not a surprise considering the S&P 500 is up 29.2% on the year with only a few trading days left to go. No matter how you slice it, that’s a monster return—the third-largest of the past 10 years.

Four sectors have performed even better than the large cap index, while seven have done worse. In this article, we take a look at the performance for the 11 sectors under the Global Industry Classification Standard (GICS), using the SPDR suite of sector ETFs as a proxy.

Energy: From Boom To Bust
At the top of the 2021 sector rankings is energy, with a nearly 55% gain. Left for dead in 2020, the sector has made a stunning comeback this year thanks to oil’s rebound from a low of less than $20 last year (based on Brent crude oil prices) to more than $80 this year.

Natural gas prices have also surged, from $1.5/mmbtu last year to more than $6 at one point this year.

No wonder energy stocks got a boost this year—though they remain well off their all-time highs set in 2014, and the sector remains very much out of favor with increasingly ESG-focused investors and those who see the obsolescence of fossil fuels in the not-too-distant future.

Real Estate Comeback

Energy’s outperformance in 2021 was a surprise, as was the stellar performance of the No. 2 sector of the year, real estate, which is up 44.3%.

The real estate sector, which predominantly comprises real estate investment trusts (REITs), has benefited from low interest rates and a comeback in commercial restate.

For instance, even though the outlook for brick-and-mortar retail is still challenged, mall operator Simon Property Group recovered all of its losses from last year and more.

Meanwhile, other REITs, such as the REIT Prologis and wireless communications infrastructure provider American Tower Corporation, have benefited from the continued growth of e-commerce and 5G, respectively.

Relentless Tech Rally

The only two other sectors to beat the S&P 500 this year are technology and financials. Tech’s outperformance needs little explanation. It’s the same story investors have heard for years.

The relentless growth of companies like Apple, Microsoft and Nvidia (which account for half of the tech’s market capitalization) has fueled consistent gains for the sector. Under GICS, Google parent company Alphabet and Facebook parent company Meta aren’t considered technology stocks anymore—though many investors would argue otherwise.

Google has performed fantastically this year, gaining 67%. Meta has delivered a more modest 27%. The communication services sector in which they both reside lagged in 2021, returning 17.7%.

Some of the top holdings in XLC outside of Alphabet and Facebook—such as AT&T, Verizon and Comcast—have lagged the market significantly, weighing on the sector’s performance.

Financials Outperform, Safe Sectors Lag

The aforementioned financials sector has been another outperformer this year thanks to the solid showing in names like Berkshire Hathaway, J.P. Morgan, Bank of America and Wells Fargo, among others.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Interest rates are still low, but they are up from last year’s record-low levels and are anticipated to rise further as the Fed begins tightening monetary policy. That may help bolster the profitability of banks, insurance companies and other financials.

Finally, consumer discretionary, materials, health care, industrials, consumer staples and utilities are the sectors with below-market returns this year, which we haven’t yet touched on.

Utilities and consumer staples are the bottom two sectors, both relatively safe groups that have been neglected amid a booming stock market.

For a full breakdown of this year’s sector performance, see the table below:

Ticker

Sector

YTD Return (%)

XLE

Energy

54.86

XLRE

Real Estate

44.25

XLK

Technology

36.18

XLF

Financials

35.48

SPY

S&P 500

29.20

XLY

Consumer Disc.

28.45

XLB

Materials

26.81

XLV

Health Care

25.60

XLI

Industrials

20.79

XLC

Communication Services

17.68

XLP

Consumer Staples

16.24

XLU

Utilities

16.23

Data measures total returns for the year-to-date period through Dec. 28, 2021.

Follow Sumit Roy on Twitter @sumitroy2

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