Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Thursday July 1, 2021. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

“Good” S&P Sectors

We prefer looking at a stock index such as S&P 500 as a conglomerate business. We have looked at  the fundamentals (Return on Equities and earnings) of several S&P 500 sectors and its own index in the past. For those who are not familiar, here are some past newsletters on this subject: 

In this newsletter, we want to expand this a little bit and look at several ‘good’ sectors and how to use index ETFs for these sectors to construct a tactical portfolio. We show that one can use these ‘good’ sectors to construct a portfolio that can outperform S&P 500 index itself both in terms of returns and risk. 

Historical earnings of S&P 500 sectors

As in the past, we look at the latest S&P 500 sector earnings from Yardeni Research. The following shows the historical earnings per share for S&P 500 11 sectors: 

From the above, we can easily see some sectors have way better (consistent and growth) earnings growth picture. These sectors are:

  • Health care
  • Information Technology
  • Consumer Staples

The other two interesting sectors are real estate and utilities. Let’s examine these sectors in some more details.

Health care

This sector has some of the best consistent growth for the past 20 years (and longer, in fact). Health care companies in the US has benefited enormously from a loosely regulated market of private health insurance and ‘out of control’ drug prices. This, coupled with the growing health care demand from an aging population, has given U.S. based and other international health care and drug companies huge profit margins and thus high profits.  It’s no wonder even the conservative and usually sector neutral index fund company Vanguard started its long running health care fund since 1984 (Vanguard didn’t have any other sector funds until 2000s). The fund has beaten S&P 500 index by a big margin:

Portfolio Performance Comparison (as of 6/4/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 9/1/1987
VGHCX (Vanguard Health Care Inv) 7.1% 15.6% 13.5% 9.8% 13.8% 11.3% 14.4%
VFINX (Vanguard 500 Index Investor) 13.3% 37.9% 17.5% 17.1% 14.7% 10.4% 10.2%

AR: Annualized Return. 

We expect this outperformance trend to continue, assuming there is no dramatical policy and market change in this sector. 

Information Technology

If the personal computer and communication network frenzy was the first wave that badly ended in 2000, the internet and fully connected technology has fully taken a hold in our economy and now the tech sector has become fully entrenched and essential for our society and economy to function properly (imagine a day without internet for your life and your company’s business). The upcoming artificial intelligence, biotech innovation, green energy tech and even the financial tech innovation (bitcoin, anyone?) will for sure make tech sector even more important and become a bigger part of our economy. Even though speculation in this sector is rampant, the fundamental (revenue and earnings) is actually very consistent in aggregate. For example, software and internet e-commerce companies have enjoyed very high profit margins for the past decades. 

Consumer Staples

This sector includes large companies that have well recognized consumer product and service brands. These products are essential household items: that’s why it’s called consumer ‘staples’. These well established brands enjoy high consumers’ trust with their long history and very diverse distribution (groceries and supermarkets) channels. These companies have produced consistent, albeit a bit lower but nevertheless good earnings growth. 

Real Estate

The other sector that’s worth consideration is real estate investment trusts (REITs). Though in the above Yardeni’s charts, it has a shorter history, this sector enjoys a stable income from real estate rental (see October 19, 2020: REIT Indexes As Businesses) . The other advantage for REITs is that it has less correlation with other stock sectors as they are more considered something between stocks and bonds because of its (somewhat stable) rental income stream. 


Finally, utilities is an interesting sector that’s more stable than most other sectors. But its low earnings growth is a concern. Nevertheless, this sector in itself is good enough to produce a very comparable and respectable long term return, compared with S&P 500. See July 1, 2019: Utilities Sector Review for more details. 

S&P good sector portfolios

Based on the above, we use ETFs for health care (XLV), information technology (XLK), consumer staples (XLP) and real estate (IYR for longer history, but can switch to VNQ from now on) as good sectors to construct the following two portfolios: 

Portfolio Performance Comparison (as of 6/4/2021):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 6/19/2000
P Composite Momentum Scoring Select Sectors 12.2% 33.2% 15.7% 15.9% 14.5% 14.1% 12.2%
P SP Good Sector Equal Weight 10.9% 27.1% 17.9% 15.1% 14.6% 11.6% 8.8%
SPY (SPDR S&P 500 ETF) 13.4% 37.9% 17.6% 17.2% 14.7% 10.6% 7.1%

AR: Annualized Return

Return chart since 6/19/2000:

Detailed year by year chart here>>

P SP Good Sector Equal Weight consists of the above four ETFs, each with 25% weight. The portfolio’s start date is 6/19/2000. This portfolio has outperformed SPY more than 1% every year since 2000. It also has lower maximum drawdown and standard deviation. 

P Composite Momentum Scoring Select Sectors uses our composite momentum algorithm that selects top 2 ETFs from the 4 candidate ETFs every month when risk asset markets are deemed to be in an up trend or just simply invests in Vanguard intermediate term Treasury fund (VFITX or IEI) otherwise. This portfolio has done way better (extra 4% annual return for the past 15 years or 5% since 2000) than SPY. Furthermore, it has 19% maximum drawdown, compared with SPY’s 55%, more than half reduction. 

In conclusion, by filtering out ‘bad’ or ‘inconsistent’ sectors, one can construct a portfolio with the ‘good’ sectors, either using a static buy and hold strategy or a tactical strategy. Such portfolios can outperform S&P 500 index by some good margins, both in terms of returns and risk (maximum drawdown). 

Market Overview

Frankly, it’s become extremely boring to make comments on current markets: stocks have been persistently higher. Investors have no fear on inflation, high valuation and any geographical risk. In fact, we again see that so called meme stocks are active again. It’s an interesting read on the stock price of AMC Entertainment Holdings (movie theaters mostly) from this Bloomberg article. Look at the charts in the article:

Now the serious investing is becoming an entertaining casino!

We are again cautiously optimistic and reiterate the following practice: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation is still extremely high by historical standard. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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