The stock market is divided into sectors, with each group of stocks having commonalities with each other, usually because they are in similar industries. The broader market is divided into 11 sectors and overall it had a great year in 2024, managing a 25% total return.
Much of 2024's overall strong performance was driven by just three of the 11 stock market sectors (communication services, financials, and consumer discretionary) that managed to outperform the total return of the S&P 500 (^GSPC +0.80%). The other sectors all still managed a positive total return (when including dividends) for the year, but the bottom five likely underwhelmed investors looking to boost their portfolios.
Investment management firm Vanguard manages hundreds of exchange-traded funds (ETFs) that follow various sectors and indexes, including ETFs that track the performance of each of these sectors. Here's a breakdown of the five worst-performing Vanguard sector ETFs in 2024, why they underperformed the S&P 500, what it would take for each fund to beat the S&P 500 in 2025, and reasons to buy or pass on each sector ETF.
5. Consumer staples sector
The consumer staples sector achieved a 12.3% total return in 2024, which is fairly decent for a relatively stodgy sector. However, the sector's performance would have been considerably worse if it weren't for outsized gains from two of the highest-weighted components in the sector, Walmart and Costco Wholesale, which returned 71.9% and 38.8%, respectively, in 2024. Other noteworthy holdings in the Vanguard Consumer Staples ETF (VDC 0.20%) include names like Procter & Gamble, Coca-Cola, PepsiCo, Colgate-Palmolive, and Target.
The consumer staples sector is a great fit for risk-averse, income-oriented investors. Consumers may pull back on household goods spending during an economic slowdown or recession, but probably not as much as discretionary categories like entertainment, vacations, etc. However, many of the companies in the sector are not expected to grow their earnings as quickly as the broader market, meaning the sector will likely underperform the S&P 500 during growth-led rallies.
The Vanguard Consumer Staples ETF managed to do a little better than the sector it represents (total return of 13.3%) and its dividend has a yield of 2.5%. Its price-to-earnings (P/E) ratio is just 24.5, making it a good overall value.
4. Energy sector
The Vanguard Energy ETF (VDE 0.20%) also managed to slightly outperform the sector it represents (6.7% total return in 2024 versus 5.6% for the sector). Its dividend has a 3% yield and a 13.5 P/E ratio, making it a good value and a powerful passive income source for investors looking for that type of performance. Over 42% of the fund is in ExxonMobil, Chevron, and ConocoPhillips stocks.
The energy sector can be highly volatile, as oil and gas prices can suffer big swings, which directly impact profits and, in turn, stock prices. Investing in a basket of energy stocks allows investors to smooth out industry risk across different names. ExxonMobil and Chevron have impeccable balance sheets and decades of consecutive dividend raises, making them excellent stocks to boost your passive income stream in 2025.
3. Real estate sector
The real estate sector comprises just 2.1% of the S&P 500, making it the second-smallest sector behind materials at 1.9%. The Vanguard Real Estate ETF (VNQ 0.20%) doesn't contain home improvement companies like Home Depot or Lowe's Companies, which are in the Vanguard Consumer Discretionary ETF. Rather, the Real Estate ETF primarily invests in Real Estate Investment Trusts, also known as REITs.
REITs allow retail investors to invest in commercial real estate -- a capital-intensive field with high barriers to entry. With a minimum investment of just $1 and an expense ratio of 0.13%, the Vanguard Real Estate ETF offers a low-cost way to invest in 159 holdings, many of which are REITs, across various industries. For example, retail REITs make up 13.4% of the fund, healthcare REITs comprise 11.7%, telecommunications REITs make up 10.7%, etc. There are multifamily residential REITs, self-storage REITs, and more.
Because many REITs pass along profits to investors through dividends, real estate is the highest-yielding sector in the market, with the Vanguard Real Estate ETF sporting a 3.7% dividend yield and a 32.8 P/E ratio. This ETF trailed the performance of the sector it follows, managing a 4.8% performance in 2024 versus a 5.2% total return for the sector.
2. Healthcare sector
The Vanguard Health Care ETF (VHT 1.14%) nose-dived 10.1% in the final three months of 2024, dragging down the ETF's overall 2024 gain of 2.7% (versus 2.6% for the sector). The bulk of the sell-off occurred in December in lockstep with a 17% sell-off in one of the sector's largest holdings, UnitedHealth Group. There's mounting reputational risk for UnitedHealth. The company has received a flurry of backlash in the aftermath of the murder of its CEO.
Regulation could lead to changes in healthcare practices and compress healthcare sector margins. Healthcare is now the fourth-largest sector by weight in the S&P 500, reflecting just how large and profitable insurance providers and drugmakers have become. One of the best ways to approach the sector could be through a diversified ETF. However, the Vanguard Health Care Sector sports a 30.2 P/E ratio and a dividend yield of 1.4%, so the sector isn't necessarily cheap and doesn't have a particularly high yield.
The sector's valuation is expensive largely because of companies like Eli Lilly. The drugmaker has a P/E ratio of 84 and makes up 10.3% of the ETF. Many leading biotech companies, like Vertex Pharmaceuticals, have inconsistent earnings or even negative earnings due to timing with clinical trials. So, in this sense, the sector isn't as expensive as it seems.
Overall, the ETF can be a solid way to put capital to work in a sector that tends to be relatively resistant to swings in the economic cycle. 2024 happened to be a down year for what is generally a solid performer.
1. Materials sector
Higher interest rates hit the materials sector hard over the past couple of years, slowing economic growth and increasing borrowing costs for the capital-intensive sector. All this contributed to the sector being the worst-performing of the 11.
The sector is sensitive to the global economy because many materials companies deal with commodities, from chemical companies to construction materials, industrial gases, paper and packaging, and more. So, a slowdown from industrial-dependent countries like China affects global demand and prices for many of these companies.
The Vanguard Materials ETF (VAW +0.80%) managed a total return of just 0.5% in 2024, slightly outperforming the sector's 0.2% total gain. The ETF has a P/E ratio of 21.8 and a dividend yield of 1.5%, making it a good value for folks who believe there will be an eventual economic recovery and higher demand for materials.
Growth stocks lead the S&P 500
The five discussed sectors showcase completely different pockets of the broader economy, but they all have one major thing in common -- a lack of mega-cap growth stocks. Mega-cap tech-focused companies have contributed the bulk of broader S&P 500 gains for years. It may surprise you to learn that Apple, Nvidia, Microsoft, Alphabet, Amazon, Meta Platforms, Tesla, and Broadcom now make up a combined 33% of the Vanguard S&P 500 ETF (VOO +0.79%), which tracks the sector. And these companies dominate their respective sectors.
The combination of size and outperformance by Apple, Nvidia, Microsoft, and Broadcom has pole-vaulted the technology sector to new heights. Alphabet, Meta Platforms, and Netflix have been carrying the communications sector. Tesla and Amazon have been leading the consumer discretionary sector.
If that trend continues, it's unlikely the consumer staples, energy, real estate, healthcare, or materials sectors will beat the S&P 500 in 2025. However, if there is a sell-off across mega-cap growth stocks, it would drag down the S&P 500 and make it easier for the lower-weighted sectors to beat the index.
In all cases, it's best to focus less on whether an ETF will outperform the benchmark in the short term and more on whether an ETF has holdings that suit your interests and risk tolerance over the long term and can help you grow closer to achieving your financial goals.
