Every stock can be sorted into one of 11 different high-level groupings, according to the commonly accepted Global Industry Classification Standard. These sectors include communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, materials, real estate, information technology and utilities.
“Even if there is a slowdown in the next couple of quarters in consumer spending, in normal cycles there is a resurgence in consumer spending as you come out of the other end of a contraction or recession,” – Daniel Milan, managing partner and investment advisor representative at Cornerstone Financial Services in Southfield, Michigan.
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In a challenging market environment like the one we’ve seen over the last year, it’s common for certain sectors to stand tall — as we saw with energy in 2022 — and others to crumble, as we saw with tech. As we head further into 2023, the pundits are debating which sectors will be favorable the rest of the year.
Depending on your point of view, the following list of 11 sector exchange-traded funds, or ETFs, should provide a way for you to get tactical exposure to just one sliver of Wall Street stocks:
| ETF | Sector | Year-to-date performance (as of May 12) |
| Consumer Discretionary Select Sector SPDR ETF (ticker: XLY) | Consumer discretionary | 14.8% |
| Consumer Staples Select Sector SPDR ETF (XLP) | Consumer staples | 3.9% |
| Fidelity MSCI Energy ETF (FENY) | Energy | -9.9% |
| SPDR S&P Metals and Mining ETF (XME) | Materials | -4.9% |
| Vanguard Industrials ETF (VIS) | Industrials | 2.7% |
| Health Care Select Sector SPDR ETF (XLV) | Health care | -2.3% |
| The Financial Select Sector SPDR Fund (XLF) | Financials | -6.3% |
| Vanguard Information Technology ETF (VGT) | Information technology | 21% |
| Vanguard Communication Services ETF (VOX) | Communication services | 19.8% |
| Vanguard Utilities ETF (VPU) | Utilities | -1.5% |
| Schwab US REIT ETF (SCHH) | Real estate | 0.4% |
Consumer discretionary: Consumer Discretionary Select Sector SPDR ETF (XLY)
“As an investor, it is important to look nine to 12 months ahead and not dwell on current market or economic conditions,” says Daniel Milan, managing partner and investment advisor representative at Cornerstone Financial Services in Southfield, Michigan. “If you look out past the inevitable recession — if we aren’t already in it — the consumer discretionary sector historically performs well, leading into a recovery period.”
The Consumer Discretionary Select Sector SPDR ETF is a strong pick for investors hoping to profit from the future recovery period. With a 0.1% expense ratio and average trading volume of 5.2 million over the past 12 months, you get high liquidity at a low cost.
“Even if there is a slowdown in the next couple of quarters in consumer spending, in normal cycles there is a resurgence in consumer spending as you come out of the other end of a contraction or recession,” Milan says. “So, looking forward, there is a strong case to be made that the expectation of a consumer resurgence late in the year or early next year could drive strength in the consumer discretionary sector.”
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Consumer Staples: Consumer Staples Select Sector SPDR ETF (XLP)
While consumer discretionary companies tend to outperform during a recovery, consumer staples are companies you want to own during a recession. These companies offer products that people can’t live without and thus continue buying even when money gets tight, such as toothpaste and diapers from Procter & Gamble Co. (PG) and food and toilet paper from Costco Wholesale Corp. (COST). Both PG and COST are top holdings in the Consumer Staples Select Sector SPDR ETF.
XLP is one of the largest consumer staples funds on the market with nearly $19 billion in assets under management. For comparison, the Vanguard Consumer Staples ETF (VDC), which holds a similar portfolio of stocks, has only $7 billion in assets. Both of these funds come with a modest 0.1% expense ratio, however, so either way, you get a great slice of low-risk consumer staples companies with one of these sector ETFs.
Energy: Fidelity MSCI Energy ETF (FENY)
The energy sector may not put up the same returns as last year, but this sector still looks strong in an era of elevated commodity prices and persistent inflation.
Investment research firm Morningstar gives FENY fund a gold rating, signaling its analysts have the highest conviction this fund will outperform over the market cycle. Morningstar researchers highlight FENY’s “sound investment process and strong management team” as contributors to its gold rating.
“Independent of the rating, analysis of the strategy’s portfolio shows it has maintained an underweight position in liquidity exposure and an overweight in quality exposure compared with category peers,” the researchers write.
The fund tracks the MSCI USA IMI Energy Index, which represents the performance of the energy sector in the U.S. equity market. It holds 121 stocks with 68% in the top 10 holdings, so make sure you aren’t overexposing yourself to these names in other parts of your portfolio.
Materials: SPDR S&P Metals and Mining ETF (XME)
Metal and mining stocks are a great way to get in on the ground floor of the materials sector.
There are other slightly larger funds, including those dedicated to just gold miners, but XME provides a more diversified mix with no single position representing more than 5.5% of the portfolio. And with $1.9 billion in assets right now, XME is certainly no slouch.
Holdings include precious metals companies such as Royal Gold Inc. (RGLD) but also mining companies such as Hecla Mining Co. (HL) and Newmont Corp. (NEM), copper king Freeport-McMoRan Inc. (FCX) and even nuclear materials company Uranium Energy Corp. (UEC). If you want a true play on raw materials, instead of a fund mostly made up of gold miners, XME is a great bet.
Industrials: Vanguard Industrials ETF (VIS)
The next step in the supply chain after raw materials comes the industrial companies and manufacturers that actually turn those commodities into goods or move the refined materials around the global economy.
While VIS isn’t the largest industrials fund on the market, U.S. News & World Report ranks it as the No. 1 ETF in the industrials sector. It earns this distinction thanks to its low expense ratio of only 0.1%, excellent tracking error and diverse portfolio. Top components in this fund include aerospace and defense giant Raytheon Technologies Corp. (RTN), conglomerate Honeywell International Inc. (HON) and heavy machinery icon Caterpillar Inc. (CAT).
Morningstar also gives VIS a gold badge, indicating analysts’ high conviction in the fund’s near-term potential.
Health care: Health Care Select Sector SPDR ETF (XLV)
One of the biggest exchange-traded funds of any flavor, XLV is a $40 billion sector fund. That means if you want to play health care, this is one of the most popular ways to do so.
As one of the most recession-proof sectors of all, health care attracts investors because one of the few certainties in life is that we all get sick and grow old. XLV is a diversified play on this big-picture trend, including 65 leading U.S. stocks such as insurance giant UnitedHealth Group Inc. (UNH), Band-Aid and Tylenol manufacturer Johnson & Johnson (JNJ) and big pharma mainstay Merck & Co. (MRK).
Financials: The Financial Select Sector SPDR Fund (XLF)
Yet another mega-sized SPDR ETF on this list, this financial sector fund is the runaway leader in the space with nearly $30 billion in assets. It features about 70 of the largest financial institutions in the U.S. Top holdings include Warren Buffett’s Berkshire Hathaway Inc. (BRK.B), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC).
Part of the reason XLF is so popular right now is because rising interest rates tend to benefit financial institutions like these that hold a lot of assets. In the long term, XLF remains a mainstay for investors regardless of the rates outlook because it is the largest and most liquid play to get exposure to leading U.S. lenders and investment banks.
Information technology: Vanguard Information Technology ETF (VGT)
VGT is neck and neck with the Technology Select Sector SPDR ETF (XLK), as both have more than $43 billion in assets under management with five-star and gold ratings from Morningstar. Both are also cheap index funds, charging just 0.1% in annual fees.
What gives VGT the edge is the fact that its portfolio is more than five times larger, with some 360 different components compared to less than 70 for XLK. Both are market-cap weighted, so they have most of their assets in the same short list of mammoth tech stocks, such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT). But when you peer further down their list of holdings, it’s clear that VGT offers a deeper look at the sector.
Communication services: Vanguard Communication Services ETF (VOX)
If you’re looking to play the communications services sector, VOX is your best bet. It is the No. 1 ETF in the communications sector, according to U.S. News, and gets a gold rating from Morningstar.
The fund includes digital communications stocks such as Alphabet Inc. (GOOG, GOOGL) and Facebook parent Meta Platforms Inc. (META), data providers and infrastructure companies like Verizon Communications Inc. (VZ), and other traditional telecoms, as well as entertainment kings like Walt Disney Co. (DIS) and Netflix Inc. (NFLX). VOX holds 115 total stocks with roughly $2.7 billion in assets and a reasonable 0.1% expense ratio.
Utilities: Vanguard Utilities ETF (VPU)
This $5.4 billion fund edges out a popular SPDR sector fund despite having a smaller bankroll. That’s because it offers a similarly low fee structure, but boasts a portfolio that is significantly larger and thus more diversified.
Admittedly, utility stocks tend to look very similar to each other and have lower risk profiles than companies in other sectors. Electricity, natural gas and water providers often have geographic monopolies, strong baseline demand and strict regulatory oversight that makes it difficult for the utility landscape to change quickly. That said, VPU’s lineup of 64 stocks makes it twice as large as its peer, the Utilities Select Sector SPDR ETF (XLU).
Real estate: Schwab US REIT ETF (SCHH)
While the SPDR and Vanguard families both have a lot going for them, they certainly aren’t the only games in town when it comes to ETFs. This Schwab sector ETF makes the cut as the best real estate-focused fund because it may not be the largest, but it offers a slightly cheaper and more diversified approach. And while not the biggest, it certainly is well established at around $5.7 billion in assets spread across more than 125 holdings.
To be clear, this is not just a play on housing or office operators. SCHH’s top positions include warehouse operator Prologis Inc. (PLD), telecom tower company American Tower Corp. (AMT) and other unconventional real estate plays to give investors full exposure to the sector.
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11 Top Sector ETFs to Buy originally appeared on usnews.com
Update 05/15/23: This story was previously published at an earlier date and has been updated with new information.
