The final numbers are in, and 2011 was officially a flat year for the S&P 500. Without dividends, the large-cap stock index was actually down a fraction. With dividends, it gained only 2.1 percent. Today we’ll look at some interesting patterns in last year’s sector action, which was quite different from the broad market.
Little Sectors Win the Year
Standard & Poor’s classifies every individual stock into one of ten primary sectors. It then publishes specific indexes for each sector (as well as dozens of sub-sectors within the ten primaries). So let’s see how each sector performed. Some were above-average, while others lagged:
What’s going on here? Only three sectors had a losing year, and one of those was off less than 3 percent. Meanwhile three other sectors had double-digit gains. So how did the index end up at break-even?
The answer lies in the fact the S&P 500 is capitalization weighted. This simply means that each stock — and therefore each sector — influences the overall index in proportion to its size.
As of Dec. 30, 2011, the stocks in the S&P 500 had an adjusted market cap totaling almost $11.4 trillion. Now, as we did above, let’s break it down by sector:
Now the index returns make more sense. One of the three largest sectors (Financials) dropped 18.4 percent for the year. The other two biggies (Technology and Energy) had gains in the low single digits.
Conversely, the best-performing sectors tended to be smaller. Utilities had a great year, but that group represents only 3.9 percent of the S&P 500′s value. The year’s other two big winners, Consumer Staples and Health Care, are mid-sized. This pair kept Financials from dragging the whole index down.
A Good Time to Stay Defensive
Another thing to notice about last year: The winning sectors were those traditionally thought of as “defensive.” Utilities, Consumer Staples, and Health Care are often among the best havens in a weak economy. That was certainly the case in 2011. Will 2012 be the same? Of course I don’t know what will happen, but I see some clues.
Utilities had a big rally in the last two weeks of the year. SPDR S&P Utilities (XLU) gained about 5 percent in that short period, then lost half of those gains in the first week of January.
To me, this looks a lot like year-end window dressing. That’s when portfolio managers pile into the yearly or quarterly winners so their clients will think they’ve been in the best stocks all along. Once the calendar turned, buying interest dried up and the Utilities sector fell.
Health Care, on the other hand, has shown much steadier recent results. SPDR S&P Health Care (XLV) actually outperformed XLU in the last quarter of 2011, rising 10 percent vs 8.2 percent for the Utilities ETF.
Bottom line: Not all “defensive” sectors are always equal. I suspect Health Care will continue to outperform. If you agree and would like to bet on this trend, here are the five largest diversified health care ETFs to consider:
- SPDR Health Care Select Sector (XLV)
- Vanguard Health Care (VHT)
- iShares Dow Jones U.S. Healthcare (IYH)
- iShares S&P Global Healthcare (IXJ)
- First Trust Health Care AlphaDEX (FXH)
Disclosure covering writer, editor, and publisher: I am long XLV. No positions in any of the other companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned. This article originally appeared in Money and Markets, a free daily investment newsletter from Weiss Research.