Forgotten Sectors Are Quietly Beating the S&P 500
Technology stocks have dominated the stock market, and make up more than one-third of the S&P 500. While major index holdings such as Nvidia, Apple and Microsoft tend to focus on their growth potential, there are tons of stocks in other industries that can offer generous returns.
Usually, the stocks you see in the headlines have high valuations, which makes them vulnerable during market corrections. That’s why some investors gravitate to stocks that may seem boring, but that can still beat the S&P 500 and tend to experience less volatility.
Neglected sectors that beat the S&P 500
Here are two overlooked sectors that offer these types of opportunities and can continue to generate returns during slower economic cycles.
Industries and infrastructure
Industrial and infrastructure companies are the backbone of many organizational structures that support the economy. This sector includes aerospace, heavy machinery, data center construction, electrical utilities and other important items. Many mature companies in this sector have high yields and low volatility, which is a good combination for investors, especially retirees who may be trying to steer clear of high-risk sectors.
Industrials make up about 9% of the S&P 500. Many of these companies are long-lived and provide dividends.
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Consumer staples
Consumers may hold back on their tech purchases when faced with financial hardship, but they will still buy food, beverages, home care products and other essentials. That’s why consumer staples can generate steady income, even if the rest of the stock market is struggling.
Businesses in this sector have pricing power and can often raise prices in line with inflation. The consumer staples sector may not outperform the S&P 500 during a bull market, but it often provides coverage from market corrections. Many consumer staples options also offer dividends, which translates into meaningful cash flow.
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How to combine these fields
Review your asset allocation. It’s common for investors to pursue growth stocks with a strong momentum, and many of those same companies are in the technology sector. However, putting too many of your eggs in one basket can leave your portfolio vulnerable during market corrections.
Investors who are more focused on technology may want to consider diversifying into lower volatility sectors such as industrials and consumer staples. That way, your portfolio won’t drop as much during a correction, and these same stocks can offer higher yields than big tech companies.
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Investors can look at individual stocks in each of these sectors by reviewing the holdings of the S&P 500 across those industries. However, you can also buy exchange-traded funds (ETFs) that track the sectors you want to prioritize as you rebuild your portfolio.
You don’t need to build your portfolio from scratch if it’s not diversified enough. However, it is wise to build a diversified base instead of putting all your money in shiny, high-risk stocks.
