Will the Least Successful Sector Stocks in 2024 Manage to surpass the S&P 500 in 2025?
In the realm of finance, the stock market is segmented into various sectors, each with a group of stocks that share similarities due to their involvement in comparable industries. The market as a whole had a remarkable year in 2024, recording a 25% overall return, yet it was primarily the communication services, financials, and consumer discretionary sectors that truly shone, outperforming the S&P 500 by a significant margin.
Unfortunately, there were other sectors that underperformed and left investors seeking ways to boost their portfolios unfulfilled. Let's delve into the five least successful sectors of 2024, as reported by investment management firm Vanguard, and explore the reasons behind their underperformance.
5. Consumer Staples Sector
Although the consumer staples sector managed a decent 12.3% total return in 2024, the figures would have been far less impressive without the contributions of the sector's heavyweights, Walmart and Costco Wholesale, which clocked returns of 71.9% and 38.8%, respectively. Notable names like Procter & Gamble, Coca-Cola, PepsiCo, Colgate-Palmolive, and Target are also part of the Vanguard Consumer Staples ETF.
This sector is often a hit with risk-averse, income-seeking investors, as it tends to hold up better during an economic downturn compared to more discretionary categories like entertainment or vacations. However, it's crucial to remember that while these companies may not face the same sort of volatility as those in sectors that rely on consumer spending, they might not grow as rapidly as the broader market.
4. Energy Sector
The Vanguard Energy ETF stands out as one of the few ETFs that outperformed its sector in 2024. Its 3% dividend yield and 13.5 P/E ratio make it an appealing option for those invested in the passive income game. The three biggest contributors to the ETF's portfolio include ExxonMobil, Chevron, and ConocoPhillips, making up nearly half of the fund.
Investing in a basket of energy stocks helps minimize industry risk by diversifying across different names. In a volatile sector like energy, where oil and gas prices can fluctuate wildly, this can help stabilize performance. With a focus on established names like ExxonMobil and Chevron, investors can enjoy both a steady income stream and a cushion against volatility.
3. Real Estate Sector
Just 2.1% of the S&P 500's overall weight is dedicated to the real estate sector, making it the second-smallest sector, narrowly surpassing materials. The Vanguard Real Estate ETF primarily invests in Real Estate Investment Trusts (REITs), which make it possible for retail investors to tap into the commercial real estate market without reaching for their pockets too deep.
With a minimum investment of just $1 and an expense ratio of 0.13%, the ETF enables access to a diversified portfolio of 159 holdings, mainly positioned across retail, healthcare, telecommunications, and more. The sector's predominant focus on dividends makes it the highest yielding sector in the market, with the Vanguard Real Estate ETF boasting a 3.7% dividend yield and a 32.8 P/E ratio.
2. Healthcare Sector
Investors should approach the healthcare sector with caution, as it remained one of the riskier segments of the market in 2024. The sector was impacted by mounting reputational risks, pricing pressure, and regulatory changes, with heavyweight UnitedHealth Group a significant contributor to these challenges.
While the healthcare sector's valuation may seem expensive at first glance, dip a bit deeper, and you'll discover that companies like Eli Lilly aren't quite as pricey as they appear, and that there are still opportunities to find value through a diversified ETF approach. Due to these factors and the sector's general resistance to swings in the economic cycle, investors often find it to be an appealing play.
1. Materials Sector
The materials sector suffered the most significant losses in 2024, with the Vanguard Materials ETF recording a total return of just 0.5%. The sector is particularly susceptible to global economic conditions, as many materials companies deal with commodities, from chemical companies to construction materials, industrial gases, and more.
Slowing demand from China can significantly impact the global economy and various commodities prices, causing disruptions for many materials companies. Although the sector may be poised for an eventual recovery, v Robinson Investment Management's Chief Strategy Officer, Mike Robbinson, suggests that interest rates have a significant impact on materials companies and their performance.
The above analysis paints a vivid picture of the stock market in 2024, highlighting the key drivers of performance and the risks that investors should be mindful of going forward.
Despite the overall market success in 2024, investing in certain sectors like materials proved challenging. The Vanguard Materials ETF experienced a meager 0.5% return, reflecting the sector's vulnerability to global economic conditions and commodity prices. Scarcity of demand from China can cause widespread disruptions in various commodities, hampering materials companies. However, Chief Strategy Officer Mike Robbinson of Robinson Investment Management suggests that interest rates may significantly influence the sector's future performance.
Investing in the healthcare sector can be risky, as companies grappled with reputational risks, pricing pressure, and regulatory changes in 2024. The sector's heavyweight UnitedHealth Group played a significant role in these challenges, yet opportunities for value and diversification still exist through a well-managed ETF approach.
In contrast, the real estate sector proved to be a stable, yet less rewarding option in 2024. With a minimal investment of $1 and a low expense ratio, the Vanguard Real Estate ETF enabled retail investors access to a diversified portfolio, focusing on the highest-yielding sector in the market.
The energy sector's fortunes varied in 2024, with the Vanguard Energy ETF outperforming its sector, primarily due to its appealing 3% dividend yield and investment in established names like ExxonMobil and Chevron. Although the sector can be volatile, investing in a diverse basket of energy stocks may help stabilize returns and minimize industry risk.
Regrettably, the consumer staples sector did not reach its full potential in 2024, with a 12.3% return, mainly credited to heavyweights Walmart and Costco Wholesale. While this sector offers stability compared to discretionary categories, investors seeking quicker growth should look towards other sectors.
