Here’s something that doesn’t surprise me: The best stock fund at Vanguard over the past decade and the worst were both sector funds—Information Technology Index (VITAX) topped the chart with a 21.0% annual return, while Energy (VGENX) posted a 0.8% yearly gain.
When you slice and dice the market countless ways, one niche will, almost by definition, lead the way, while another will be the least favored. The rub is that many investors who see Information Technology ETF’s returns will want to try their hand at picking the next winner; they don’t stop to think that their selection could end up being the next Energy.
So, let’s use the slow summer months, with the market nearing its previous high, as an opportunity to take a deeper look at Vanguard’s sector funds—keeping both rewards and risks in our sights.
After all, making a big bet on a single slice of the stock market can be a path to happiness or heartache. We’d better know what we’re doing before putting any chips on the table.
Key Points
- The largest stocks dominate their sector index funds.
- Successfully trading market sectors takes discipline, patience and luck. Proceed with caution, if at all.
- Health Care, Technology and Consumer Staples show the most promise as sectors to hold for the long run.
Vanguard started sector investing almost 40 years ago, in May 1984, with the launch of five actively managed funds. Only two remain. The rest of Vanguard’s sector options are index funds and ETFs.
For now, I will set aside Real Estate Index (VGSLX & VNQ) and Global ex-U.S. Real Estate Index (VGRLX & VNQI). Real estate is more of a hybrid or alternative asset than a sector—a topic for another day. (Plus, one of the two is a foreign fund.) I’ll cover them in another article, along with the two remaining active sector funds.
In this article, I’ll focus on the 10 MSCI-index-based U.S. sector funds Vanguard launched in 2004. While we have nearly 20 years of live performance of these funds, I’ll share the returns of the underlying indexes, which go back to 1995, to give us additional perspective. But before we talk performance, let’s look under the hood.
Vanguard’s Sector Slices
You should always know what you own, so in the table below, you’ll find the top holdings and a few key stats for each sector index fund. And remember, as I told you before, Vanguard’s index funds and their ETF siblings are interchangeable. What I say about the index funds goes for the ETFs, and vice versa.
Under the Hood
| Consumer Discretionary | Consumer Staples | Energy | Financials | Health Care | |
| # of Stocks | 308 | 105 | 113 | 394 | 418 |
| Median Mkt. Cap | $170.0 | $151.5 | $66.9 | $93.1 | $118.6 |
| P/E Ratio | 29.2 | 25.0 | 6.4 | 15.3 | 24.9 |
| % in Top 10 | 62% | 62% | 66% | 44% | 47% |
| Top Ten Holdings | |||||
| 1 | Amazon | Procter & Gamble | Exxon Mobil | Berkshire Hathaway | UnitedHealth Group |
| 2 | Tesla | PepsiCo | Chevron | JPMorgan Chase | Johnson & Johnson |
| 3 | Home Depot | Coca-Cola | ConocoPhillips | Visa | Eli Lilly |
| 4 | McDonald's | Costco Wholesale | Schlumberger | Mastercard | Merck |
| 5 | NIKE | Walmart | EOG Resources | Bank of America | AbbVie |
| 6 | Lowe's | Philip Morris | Marathon Petroleum | Wells Fargo | Pfizer |
| 7 | Starbucks | Mondelez | Occidental Petroleum | S&P Global | Thermo Fisher |
| 8 | Booking | Altria | Pioneer Natural Resources | American Express | Abbott Labs. |
| 9 | TJX Cos. | Colgate-Palmolive | Valero Energy | Goldman Sachs | Danaher |
| 10 | Ford Motor | Kimberly-Clark | Phillips 66 | Morgan Stanley | Bristol-Myers Squibb |
| Industrials | Info. Tech. | Materials | Comm. Services | Utilities | |
| # of Stocks | 389 | 322 | 116 | 118 | 65 |
| Median Mkt. Cap | $43.7 | $359.1 | $34.1 | $167.3 | $31.3 |
| P/E Ratio | 20.6 | 34.1 | 15.3 | 24.4 | 20.8 |
| % in Top 10 | 28% | 62% | 51% | 69% | 52% |
| Top Ten Holdings | |||||
| 1 | Raytheon | Apple | Linde | Alphabet | NextEra |
| 2 | Honeywell | Microsoft | Air Products and Chemicals | Meta Platforms | Southern |
| 3 | UPS | NVIDIA | Sherwin-Williams | Netflix | Duke Energy |
| 4 | Caterpillar | Broadcom | Freeport-McMoRan | Walt Disney | Sempra Energy |
| 5 | Union Pacific | Adobe | Ecolab | Verizon | American Electric Power |
| 6 | Boeing | Cisco Systems | Nucor | Comcast | Dominion Energy |
| 7 | General Electric | Salesforce | Corteva | AT&T | Exelon |
| 8 | Deere | Accenture | Dow | T-Mobile US | Xcel Energy |
| 9 | Lockheed Martin | Oracle | PPG Industries | Activision Blizzard | Consolidated Edison |
| 10 | ADP | Advanced Micro Devices | Newmont | Charter Comm. | Public Svc. Enterprise |
| Data as of June 30, 2023. Source: Vanguard and The IVA. | |||||
Unlike some offered by other investment houses, Vanguard’s sector index funds are highly concentrated. Even though they hold stocks of all sizes (large, mid and small-cap), the largest stocks dominate.
The two consumer (Discretionary and Staples) and the two tech-related sectors (Information Technology and Communication Services) are extreme cases of winner-take-all portfolios—more than 60% of each fund’s assets go toward the largest ten stocks. If you buy one of these sector funds, you’d better have a positive outlook on the most prominent companies because their ups and downs will determine overall performance.
Notably, the companies allocated to different market sectors are not written in stone, nor is their categorization always obvious.