Best Sectors to Beat the Market in the Long Term

The 3 Best Types of Sector Funds to Invest for the Long Run

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If you want to outperform the stock market averages over time, one way to do it is to invest in the best sectors of the market. Fortunately, there are mutual funds and exchange-traded funds (ETFs) that invest in sectors that have potential for growing faster than the overall economy. Learn more about these top performing sectors and why they have great potential.

Beat the Market With Sector Funds

When investors, traders or fund managers are attempting to "beat the market," they are typically attempting to beat the a broad market index, such as the S&P 500. In simple terms, if you want to beat the S&P 500, one way to do it is to invest in sectors that end up outperforming the index. A great way to get focused exposure to these areas of the market is with sector funds.

Since no one knows with certainty which stocks or sectors will beat the index, the best you can do is to look at historic performance and make a few assumptions about the future. Some market sector examples include technology, health, financials, consumer staples, consumer discretionary, industrial, energy and utilities.

Best Sectors for the Long Term

Choosing the best sectors to buy for the future doesn't take incredible luck or a large amount of research. All it takes is a brief study of trends and a bit of research on historic performance. To lead by example, we researched three sectors and chose three that have outperformed the S&P 500 over the past 10 years.

Here are some of the best sectors to buy now for the future:

Health Care Sector

With an aging population and rapid advances in biotechnology, the health industry leads all other industries over the past decade and will likely continue that trend in the future. The healthcare sector is quite broad. Health care industry businesses include hospital conglomerates, institutional services, insurance companies, drug manufacturers, biomedical companies, or medical instrument makers.

When many industries are doing poorly due to negative economic conditions, the health industry can still perform relatively well because people still need to see the doctor and buy their drugs, regardless of economic conditions. For this reason the healthcare sector is considered a "defensive sector."

Best Sectors: Technology

Also called Information Technology, the technology sector is at the forefront of innovation and at the center of the Information Age, which has shaped the economy over the past 20 years and looks to continue that trend for the foreseeable future. The technology sector is a category of stocks that contains technological businesses, such as manufacturers producing computer hardware, computer software or electronics and technological service industry companies, such as those providing information technology and business data processing.

Some examples of technology companies include Apple (AAPL), Microsoft (MSFT), Google (GOOG) and Facebook (FB).

Less than 15 years ago, there was no such thing as an iPhone. Keep in mind that other technologies and tech companies that we don't currently imagine are sure to come along with new innovations in the future.

Best Sectors: Consumer Discretionary

Also called consumer cyclical stocks, the consumer discretionary sector includes businesses that provide products and services that are considered more of a luxury than necessity. These stocks are considered to be cyclical because demand for products and services in this sector tend to be higher during certain parts of the economic cycle, such as the growth phase.

Examples of consumer discretionary stocks include Apple (AAPL), Disney (DIS) and Starbucks (SBUX). Consumers tend to demand products and services of these companies when the economy is growing and consumers feel confident about their financial future.

Bottom Line

While past performance is no guarantee of future results, an investor can choose to invest in sectors that have outperformed in recent history. For example, the health care and technology sectors are top performers over the past decade. It's possible that these sectors will continue to lead in the future. However, there is no guarantee of this.

Before buying sector funds, investors should keep in mind that too much exposure to one sector, especially in the form of short-term market timing, can prove harmful to an investor's portfolio. A good portfolio strategy with sector funds is to add them as satellites to diversified core holdings. This way, you're not putting all of your eggs in one basket, so to speak; you're simply putting a few more eggs in a few select baskets.

For more information on how to build this kind of portfolio, see our article on core and satellite portfolios.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

Article Sources

  1. Morningstar. "Morningstar Stock Sector Structure," Page 2. Accessed July 14, 2020.

  2. Morningstar. "Morningstar Stock Sector Structure," Page 1. Accessed July 14, 2020.

  3. Fidelity. "Consumer Discretionary." Accessed July 14, 2020.