Which Industry Sectors will Outperform?
By Ronald L. DeLegge
February 8, 2010

SAN DIEGO (ETFguide.com) – The stock market is as diverse a place as any. It consists not just of individual stocks, but of specific industry groups or sectors. And while each of these sectors when put together makes up the entire stock market, their individual performance is rarely identical to the total market. Look no further than 2009.

Last year, for example, materials and technology stocks within the S&P 500 (NYSEArca: SPY) outperformed the total U.S. stock market (NYSEArca: VTI) by a wide margin. VTI rose an impressive 28.82 percent but tech (NYSEArca: XLK) jumped 50.95 percent and materials (NYSEArca: XLB) soared by 48.49 percent.

Which industry sectors will rise above the rest in 2010?

Let’s analyze a few potential winners.

Consumer Staples Stocks (NYSEArca: XLP)
A quick gander at top holdings inside XLP illustrates the defensive nature of this particular industry sector. Procter & Gamble, Coca-Cola, CVS Caremark Kraft Foods and Wal-Mart and other consumer giants are among the top ten holdings. Although the pace of consumption by Americans may be slowing, it’s doubtful that it will go away completely.

XLP follows the 42 consumer staples stocks within the S&P 500 and last year it increased by 14.22 percent. XLP’s annual expense ratio is 0.21 percent.

Healthcare Stocks (NYSEArca: XLV)
Over the past year, the political rhetoric of major healthcare reform has taken a toll on the healthcare sector. For now, Democrats losing the Senate supermajority seems to have put an end to the possibility of major changes that would’ve upended the sector.

S&P 500 healthcare stocks increased by almost 20 percent in 2009, but still underperformed the broader market. According to AltaVista Independent Research, S&P healthcare stocks have a 2010 EPS of 2.66 and the lowest P/E ratio among S&P sectors. Healthcare stocks represent around 13 percent of the S&P 500.

Utility Stocks (NYSEArca: XLU)
Because of their steady dividends and non-cyclical nature, utilities have long been considered a defensive haven. The utilities sector includes companies involved in electrical power, natural gas distribution and water. Exelon, Dominion Resources and Duke Energy are among XLU’s top holdings.

XLU’s yield is around 4 percent, but the performance of utility stocks over the past few years has disappointed. In 2009, utilities lagged the market and in 2008 they weren’t spared from the voracious fall in global stocks.

Conclusion  
So far this year, all nine S&P 500 industry sectors are posting negative returns. Last year’s leaders (tech and materials) are this year’s laggards. Financial stocks (NYSEArca: XLF), energy stocks (NYSEArca: XLE) and industrials (NYSEArca: XLI) are down between two to five percent.

The bear market rally in stocks since March 2009 has been one of the most powerful upswings in history. Is it running out of steam? While this year’s action is reminiscent of Q1 2008, it remains to be seen if the selling pressure will intensify into full blown mayhem. Stay tuned, we should have an answer soon.