7 Stock Market Sectors to Consider When Rebalancing Your Portfolio

After a volatile year, investors may need to rebalance their portfolio.

December and January are prime months for portfolio rebalancing. After a very volatile year, asset allocations may be out of alignment, which means investors could find buying opportunities in certain sectors of the stock market. Looking to 2021, Joanna “Jody” Jonsson, portfolio manager at Capital Group, says markets rose late this year as “people are expecting something that looks more like normal.” How quickly normal returns will depend on vaccine acceptance, government spending and stimulus, and how people and companies feel about investing and spending money, she adds. For investors who are ready to rebalance their portfolio, here are seven sectors and subsectors to consider.

Consumer staples

Consumer staples, which includes products such as toilet paper and toothpaste, saw a jump in demand at the beginning of the pandemic, and Morgan Hill, CEO and owner of Hill & Hill Financial, says he believes the consumer staples sector has staying power, even as vaccines roll out and the economy begins to normalize. “What I think is going to last through COVID is just this mindset about the need for daily essentials,” he says. Specifically, he looks at firms such as Procter & Gamble (ticker: PG) and Target Corp. (TGT) — long-established companies, with a history of increasing dividends. “They’re boring, but they’re consistent earners,” Hill says.


For investors with a growth tilt, the technology sector has been rewarding. Hill says that will continue and that technology is a good counterweight to the consumer staples sector. The sector’s importance was highlighted when people pivoted to spending more time at home working, learning, shopping and even checking in with their doctor. To take advantage of technology’s growth, Hill uses the ARK Innovation ETF (ARKK). “Even though the price has gone up, they’ve got a really good track record,” he says. “I’m a fan.” ARKK is up 150% year to date and has a five-year annualized return of 39.2%. Top holdings include electric vehicle maker Tesla (TSLA) and virtual care provider Teladoc Health (TDOC). The exchange-traded fund also comes with an annual expense ratio of 0.75%, or $75 for every $10,000 invested.

Real estate

Hill says including alternatives to traditional stocks and bonds is one way to diversify a portfolio, and he likes real estate. Investors should be selective, though, as the pandemic has hit certain real estate sectors such as retail stores particularly hard. He likes residential real estate investment trusts, or REITs, since they offer solid income for investors who are searching for yield. Two that he uses are Bluerock Residential Growth REIT (BRG), which has a 5.5% yield, and Preferred Apartment Communities (APTS), which has a 10.4% yield. Hill also notes these two companies “didn’t lose a penny during COVID.”


Josh Simpson, financial advisor with Lake Advisory Group, says he’s expecting stocks in the travel subsector and others hit hard by the pandemic-induced lockdowns to benefit from the reopening trade. Specifically, he’s looking at airlines and hotels to rebound. “Once people start feeling comfortable again, they’ll want to start traveling,” Simpson says. However, he adds that within the travel subsector, he’s avoiding cruise lines because of the necessary cleaning protocols between voyages. While most travel-related ETFs are very broad-based, some funds offer a narrow bet on airlines — like the U.S. Global Jets ETF (JETS). While JETS is down 28% year to date, the fund has roughly doubled in price since its spring lows.


Global energy use cratered due to lockdowns from the pandemic, and the energy sector remains the worst-performing sector in the S&P 500 in 2020 — down more than 30% year to date. That said, if a vaccine is successfully rolled out and people start returning to offices and going on vacations, energy use will pick up, says Mark Brown, managing partner of Brown and Co. Even if demand does not return to pre-pandemic levels, a sustained pickup in demand from a somewhat return to normal life will support both energy stocks and energy prices, he says. The largest energy ETF by assets is the Energy Select Sector SPDR Fund (XLE), with $13.8 billion under management. Top holdings include Big Oil names such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), and the fund as a low expense ratio of 0.13%.


Materials stocks have benefited from the global recovery and falling U.S. dollar since March, says Chuck Self, chief investment officer at iSectors. He notes that these trends are creating greater demand for basic materials from foreign countries. “Even if the U.S. economy slows, international sales should hold (materials stocks) steady until the U.S. recovers,” he says. “Although the sector has outperformed the market this year, it is still under-owned and poised to catch up from its underperformance over the past five years.” One way to get broad exposure to the materials markets is through the Materials Select Sector SPDR Fund (XLB), which is up 20% this year. This ETF also comes with a low expense ratio of 0.13%.

Health care

The pandemic accelerated many trends already in place, such as digitization, Jonsson says, and she expects that to continue. “Entire industries have been transformed in this very short time, like health care with telemedicine and with a big uptake in digital monitoring devices,” she says. Jonsson is focusing on companies where the long-term business model was strengthened by recent events. “I probably heard more companies in the last year in health care that are doing truly outrageously innovative things than I’ve ever heard before,” she adds. For investors who want a diversified approach to the health care play, a newer ETF, the Global X Telemedicine & Digital Health ETF (EDOC), seeks to invest in companies in those two areas. Top holdings include diagnostics and pharma services company NeoGenomics (NEO) and developer of life science tools Illumina (ILMN).

Seven best sectors for rebalancing a portfolio today:

— Consumer staples.

— Technology.

— Real estate.

— Travel.

— Energy.

— Materials.

— Health care.

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7 Stock Market Sectors to Consider When Rebalancing Your Portfolio originally appeared on usnews.com

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