Why have these three Vanguard ETFs been lagging behind the S&P 500's performance since Election Day?
The S&P 500 observed a surge following the election results, clocking in a 3.8% increase since November 5, as of Wednesday's prices. However, not all stock market sectors participated in this rally.
Vanguard, an investment management firm, offers low-cost exchange-traded funds (ETFs) that mirror the performance of each sector within the stock market, according to the Global Industry Classification Standard. These ETFs follow the 11 sectors and boast an annual expense ratio of 0.1%, charging only $0.10 for every $100 invested. They provide a cost-effective method to target any sector that catches your interest.
Let's delve into why the Vanguard Utilities ETF (-1.08%), Vanguard Consumer Staples ETF (-0.08%), and Vanguard Health Care ETF (-0.83%) have been lagging behind the S&P 500 after the election results, and whether buying any of these ETFs now is a wise choice.
1. Vanguard Utilities ETF
The Vanguard Utilities ETF surged 27% up to September's end, placing it as the top-performing Vanguard sector ETF at the time. However, this growth slowed down in October, most likely due to valuation concerns. The fund had dipped slightly as of election day, with a 23% year-to-date (YTD) gain, just below the S&P 500's 26% gain at the same time.
The stock market favors security during uncertain times, making utilities an attractive choice for nervous investors seeking relatively secure investments. The Vanguard Utilities ETF primarily invests in regulated electric utilities, which depend on government agencies and regulators to set prices. While this keeps growth prospects limited, it provides a steady income stream and guarantees reliable dividend payments.
Electric, natural gas, and water utilities profit from population growth and increased resource consumption. This can lead to long-term gains for the sector. However, utilities lack the cyclicality of sectors such as industrials or financials, which gained ground post-election results due to the potential for less regulation and the relocation of industrial production and manufacturing.
Lower interest rates can further benefit the utility sector. Many utilities have high levels of debt due to investing in capital-intensive projects to diversify their energy sources. If the new administration is more pro-oil and gas and offers fewer incentives for renewable energy, these investments may not seem as appealing.
Overall, the drop in the utility sector is understandable. Yet, the Vanguard Utilities ETF continues to attract income investors due to its 2.9% yield.
2. Vanguard Consumer Staples ETF
The Vanguard Consumer Staples ETF's leading holdings consist of well-known names such as Procter & Gamble (0.19%), Costco Wholesale (-0.67%), Walmart (0.16%), and Coca-Cola (0.37%). For a while, all four had hovered near their record highs. However, some prominent consumer staples companies, including P&G and Coke, have experienced a downturn after reporting disappointing earnings and decreased sales volumes. Meanwhile, Walmart and Costco have soared 59.6% and 38.4%, respectively, this year, as of midday Wednesday. In fact, the ETF itself had only managed to increase 0.2% since the election results.
The Vanguard Consumer Staples ETF may be losing ground due to the financial difficulties encountered by key holdings such as P&G and Coke and the inflated valuations of companies like Walmart and Costco. Another potential cause is investor interest in more growth-focused companies following the election results. Like utilities, consumer staples benefit from increases in consumption and population growth, but they lack the growth potential of sectors like industrials, consumer discretionary, or financials.
With a yield of 2.6%, the Vanguard Consumer Staples ETF remains a competent source of passive income, making it an attractive proposition for conservative investors. However, it is worth mentioning that two of the ETF's top 10 holdings are tobacco-centric companies, Philip Morris and Altria Group. Investors who feel uncomfortable with these investments may prefer to purchase individual high-yield consumer staples stocks instead.
3. Vanguard HealthCare ETF
The Vanguard HealthCare ETF has experienced significant changes in its composition lately - notably due to the large-scale increases in the market cap of drug manufacturer Eli Lilly (-1.27%) and insurance giant UnitedHealth Group (-2.10%). Collectively, these two companies account for nearly 20% of the Vanguard HealthCare ETF, surpassing legacy industry leaders like Johnson & Johnson.
The healthcare sector is unique in that it encompasses both growth-oriented biotech firms and established dividend-paying value stocks, such as Merck. The sector has become a hot topic in political discourse among leading U.S. parties. Its underperformance may be a result of uncertainty regarding the potential impact of new policies on it. Major moves by key healthcare holdings are also shaping the sector's performance.
Eli Lilly stock has decreased by more than 12% since it reported its third-quarter earnings on October 30. Merck has been in decline for months, hovering near its 52-week low. In contrast, UnitedHealth and Intuitive Surgical have recently reached all-time highs following impressive quarterly financial reports.
In summary, the healthcare sector presents a diverse scenario at present, and this specific ETF has decreased by 0.3% post-election. Regardless, it remains an excellent investment opportunity within the broader sector. However, some investors might opt for investing in a specific industry or a blend of businesses instead of the ETF. Take risk-averse investors, for instance, who might favor more affordable, higher-dividend stocks. On the other hand, risk-tolerant investors could choose to purchase shares of rapidly expanding biotech firms, even if they hold substantial valuations.
- Individuals interested in diversifying their investment portfolio and focusing on sectors that provide reliable returns may consider investing in low-cost ETFs, such as Vanguard's finance-related offerings, which include the Utilities, Consumer Staples, and Health Care ETFs.
- For those who are keen on investing in finance, it's essential to know that while sectors like utilities and consumer staples have historically provided consistent income, they may not offer the same growth potential as more cyclical sectors, like technology or industrial stocks, which saw significant gains following the election results.
