As the year draws to a close, investors have started looking forward to 2011. With the market having made substantial gains over the past two years, it's more important than ever to make sure you identify investments that still have room to run. Otherwise, you could easily see the rebound you've probably enjoyed in your portfolio since the market meltdown reverse itself.
A look at market sectors
Since late 2008, the entire market has shown a lot of strength, recovering strongly from the financial crisis. Currently, the S&P is up 40% from December 2008, having posted a rise of about 13% in the past 12 months to go with 2009's big jump.
But the gains in the market haven't been felt equally. Some sectors have performed a lot better than others. In particular, consumer discretionary stocks have rebounded the most, with technology and materials also posting strong gains from two years ago. The strength of discretionary stocks isn't terribly surprising, looking at the performance of Amazon.com and Ford Motor
Meanwhile, other stocks can hardly point to any gains from the depths of the market meltdown. Utility stocks and health-care companies alike have shown only modest gains over the past two years, with utility Exelon
So with all that as background, you need to turn around and ask the much more important question: Where will next year's best-performing stocks be, and how can you best invest in them?
From a value standpoint, looking at the beaten-down sectors is the obvious place to start. Among the two worst-performing sectors of the past two years, health care has a lot more promise than utilities right now. Many utilities are hyper-regulated and need demand to rise, yet one of the biggest drivers of utility revenue, natural gas, remains mired in a multi-year bear market and shows signs of glut conditions for years to come. In contrast, the worst news for the health-care industry is behind it, as investors fully expect health-care reform to bite hard into profits. That's indeed possible, but any reality that falls short of those fears could give shareholders a big boost. That's why betting on health care using the SPDR Health Care
Conversely, even after big gains, some of the top-performing sectors could easily see more gains. Even though technology stocks have seen some huge winners, several major players haven't really participated. Cisco Systems
The prospects are perhaps more uncertain for consumer discretionary stocks. Most of the easy gains have already been made for many companies, and with valuations that assume the consumer will be back in full force, any shortfall in expectations could hit stocks hard. That makes SPDR Consumer Discretionary a highly uncertain prospect right now.
Make the right play
Sector-specific investing is challenging, as sectors move in and out of favor. But if you can identify potential winners and anticipate future trends, sector ETFs give you the easiest way to profit from your foresight.
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Fool contributor Dan Caplinger does his best to be smart. He doesn't own shares of the companies mentioned in this article. Exelon and Pfizer are Motley Fool Inside Value picks. Amazon.com and Ford Motor are Motley Fool Stock Advisor recommendations. The Fool owns shares of and has a bull call spread position on Cisco Systems. Motley Fool Options has recommended writing covered calls on Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy makes you a smarter investor.