Stock investors have plenty of reason to celebrate because they’re closing out the fourth year of a bull market. The big question now is what next year will bring.
During my lifetime, three other bull markets lasted through a fifth year. But you know what? Whether the broad market goes up or down next year, there will be some sectors that post much better results.
Consider this:
- Telecom Services is the best performing sector so far this year, returning 30.9% through December 15. But that comes after a dismal 2005, when the sector lost 9%.
- Energy, meanwhile, is up 26.2% so far this year … on top of a 29% gain in 2005 … and a 28.7% return in 2004.
- Healthcare and Information Technology have pretty much been the laggards of the S&P 500 for the past three years.
For the full scoop on how each of the ten sectors has performed over the past three years, take a look at the graph. The yellow bar represents performance in 2004, the purple bar is 2005, and the blue bar is 2006 through December 15.
As you can see, sectors like energy and utilities have been rolling along for three years straight, absolutely trouncing what the broad market did.
What Sectors Will
Lead Going Forward?
I make no bones about it — I’m partial to energy and basic materials for the simple reason that I’m convinced we’re in a commodity supercycle.
The fact that energy has outperformed for three years might worry some investors who might think it can’t continue providing outsized returns. But even if it does cool off a little, its upward trend is still firm.
Remember, the Chinese put seven million new vehicles on their roads last year, and will likely do the same this year. Plus, here in America, sales of large SUVs and trucks are coming back now that gasoline prices have backed off their highs.
Meanwhile, global oil production is flattening out, as demand keeps going up. I think energy is still a good bet for 2007 … especially if your goal is simply outperforming the S&P 500.
I also like basic materials. That sector has returned 17.7% so far this year. A pullback in copper could weigh on the sector in the first quarter if the U.S. housing market continues to cool. But, overall, global demand for basic materials is strong and getting stronger. That’s why this sector should do very well in 2007.
I was a bit surprised to see how well the two consumer sectors (discretionary and staples) did in 2006. I still expect debt-laden U.S. consumers to eventually fold their tents … or the ARM loans on their McMansions. But if I had to choose between these two sectors for 2007, I’d want to put my money on consumer staples. I’m conservative that way.
There’s no arguing that telecom services had a great 2006. And if we’re in a cyclical bull for telecom, that could continue for a while. Information technology, meanwhile, is coming off a pathetic 2005 (0.38% rise) with a respectable 9.7% return in 2006. Of course, it’s still lagging the S&P 500’s 14.3% return, though.
If I had to bet on a cyclical comeback kid, it would be industrials. That sector performed just as plug ugly as information technology in 2005 (0.36%) and is slightly topping it in 2006 with an 11.6% rise.
Lastly, if we have another good year in the market in 2007, expect healthcare to end up in the doghouse again. Reason: Healthcare is for investors playing defense. But if you think the market is ready to go to the dogs, well, you might want to check your money into the healthcare sector.
So, now that I’ve told you what sectors I like for 2007, you’re probably wondering what the best way to invest in them is. My answer is exchange-traded funds (ETFs). Here’s why …
ETFs Level the Playing Field
For Individual Investors
Once again this year, most mutual funds are not keeping pace with the market. About 70% of actively-managed mutual funds are underperforming the S&P 500.
One of the big reasons is their fees and expenses. But in the past, individual investors either bought individual stocks or ponied up and invested in mutual funds. It was very difficult to get a well-diversified stake in a particular part of the market without either a big hassle or considerable costs.
Nowadays, however, investors looking to move in and out of sectors can opt for ETFs, which generally (not always) have lower expense ratios than actively-managed mutual funds. Over time, lower expenses can really make a big difference:
Let’s say your ETF has an expense ratio just 1.1% lower than the leading actively-managed fund. A 1.1% difference adds up to big bucks over time. Let me show you how:
If you put $50,000 into an ETF with a 0.4% total expense ratio and another $50,000 into a mutual fund with a 1.5% expense ratio. If both return 10% a year for 10 years, the total return on the ETF will be nearly $12,000 more than on the mutual fund!
More and more investors are turning to ETFs when they want to outperform the S&P 500 and do it as cheaply as possible. According to the most recent data from the Investment Company Institute (ICI), $33 billion flooded into US ETFs in October alone. That’s an increase of 9.4% from September and a 45.3% jump from a year earlier.
Think about that — the amount of money in ETFs jumped nearly 10% in one month alone! Holy cow! And it’s easy to see how picking the right ETFs can allow you to ride that wave in 2007 … and for years to come.
That’s partly why I put together my special report, “ETFs Made Easy.” Along with explaining in more detail (and with handy links) how to use ETFs for sector rotation, it also lists ETFs by their investment focus and their expense ratios. In other words, my report will show you how to make sure you don’t overpay for a fund.
Of course, for real outperformance in ETF sector rotation without having to make all the calls on your own, you can also turn to the smarties running ETF Power Trader. Those guys really know what they’re doing. You can find out more about what they have to offer by calling 1-800-393-1706. And best of all, as part of signing up, you’ll get my ETF special report for free!
The year is drawing to a close. Now’s the best time to make your investment decisions for 2007 … because the earlier you start down the right path, the closer you are to a great finish. I hope you had a great 2006, and may 2007 be even better.
Yours for trading profits,
Sean
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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