Top 4 Outperforming Market Sectors

Although past performance is no guarantee of future outcomes, looking back at the performance of entire sectors can give you a good idea of where most of the growth in the market is taking place. In the figure below, we compare the past 5 years of returns for the top 4 performing market sectors. For this comparison, we used Vanguard sector index ETF's to measure the total returns for the 5-year time period ending from the date this was published.

Using the past 5 years of data seems to encompass a lot of volatility in the market but gives a wide range of both growth and value outcomes. The properties of these sector index funds can illustrate the potential for growth into the future as we look back at how they reacted to exogenous market forces such as the pandemic and geopolitical events and also shifting trends within our economy.

Information Technology

As represented by the blue line, the Information Technology sector as invested by the Vanguard Information Technology sector index ETF (VGT) has the most past and current growth. Its returns far outpace the other sectors in this list. This outperformance is most likely attributable to the artificial intelligence and digitalization trends occurring in the economy.

The next 3 sector's experience more similar growth patterns to each other when contrasting it with the Information Technology sector.

Consumer Discretionary

Backed up by and economy that runs on consumption, the Consumer Discretionary sector has great potential for growth when the economy is humming along, and the consumer feels confident with their individual financial outlook along with a strong labor market and stable prices. This sector is represented by the red line in the chart above as invested by the Vanguard Consumer Discretionary index fund (VCR.) and comes in second place for highest 5-year returns among these sectors.

Industrials

Similar to the Consumer Discretionary sector, the industrial sector needs similar confidence in the economic and financial outlook on the part of businesses to drive future demand for industrial activity such as construction and manufacturing. With a solid economic outlook and greater confidence for businesses to invest in the future, this drives the Industrial sector towards greater returns. Represented by the green line, as invested by the Vanguard Industrial Sector index ETF (VIS), this sector came in 3rd for highest returns among these sectors.

Communication Services

Coming in at 4th on this highest performing sector list, Communication Services, represented by the purple line, as invested by the Vanguard Communication Services index ETF (VOX). This sector has a solid potential for growth and stable characteristics as a growing share of economic activity takes place under the communication services industry's umbrella of services and products that businesses and consumers rely on.

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