Source: Getty Images. The top performer is…Communications emerged as the leading sector last year, delivering a total return of 34.8% (including capital gains and dividends). This success was driven by the three major players in the sector: Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Netflix (NASDAQ: NFLX), which saw impressive increases of 35.5%, 65.4%, and 83.1%, respectively, in 2024. The sector also includes traditional media giants like Comcast and Walt Disney, telecom companies, and more. Despite its recent strong performance, the sector still presents good value prospects going into 2025.
Legacy media companies and telecom giants are known for offering dividends and having attractive valuations. Even tech giants like Alphabet and Meta have reasonable valuations due to their strong cash flow and earnings growth. However, the sector’s performance heavily relies on advertising and consumer spending, making it susceptible to downturns in those areas. Nevertheless, the long-term outlook remains positive, especially with Meta’s success in monetizing Instagram and Netflix’s improving margins and pricing power.
Vanguard provides low-cost ETFs focused on the sector with expense ratios as low as 0.1%. The Vanguard Communications ETF (NYSEMKT: VOX) tracks the sector’s performance, offering a straightforward way to invest in companies like Alphabet and Meta.
Financials sector presents opportunities for value-minded investors. The financial sector stood out as a top performer in 2024, featuring companies such as Berkshire Hathaway, major banks like JPMorgan Chase and Bank of America, investment banks like Goldman Sachs and Morgan Stanley, payment processors like Visa, Mastercard, and American Express, insurance companies, and more. The sector benefited from higher interest rates, which can lead to expanded net interest margins for banks. However, higher rates can also impact economic growth.
Last year showcased solid economic growth despite higher rates, benefiting integrated and investment banks, which saw record profits and stock prices. Payment processors like Visa demonstrated resilience due to network effects, maintaining moderate earnings growth despite consumer spending pressures. While the financial sector has seen significant gains, it remains relatively attractive when compared to the broader market. The Vanguard Financials ETF (NYSEMKT: VFH) offers a P/E ratio of 17.1 and a dividend yield of 1.6%, making it a reasonable choice for investors seeking exposure to the sector.
Consumer discretionary sector ends on a high note. The consumer discretionary sector experienced a sluggish start but rallied in the second half of the year, driven by Tesla (NASDAQ: TSLA) and Amazon (NASDAQ: AMZN), resulting in a total return of 26.6% in 2024. This sector encompasses a variety of industries, including carmakers like Tesla and traditional automakers.
The consumer discretionary sector includes a mix of companies, with some arguing that Tesla leans more towards technology while traditional automakers like Ford and General Motors align with industrial sectors. Amazon and MercadoLibre are tech-focused companies within this sector, alongside well-known names such as McDonald’s, Starbucks, and Nike.
The Vanguard Consumer Discretionary ETF (NYSEMKT: VCR) is dominated by top holdings like Amazon, Tesla, Home Depot, and Lowe’s Companies, comprising 45.7% of its weighting. With 298 components, the fund achieves decent diversification, though it can be sensitive to economic cycles. Consumer spending slowdowns may impact sectors like home improvement and luxury spending, affecting overall performance.
While the sector has seen growth with companies like Amazon and Tesla, leading to higher valuations, it still offers opportunities for market-beating gains if the economy remains stable and consumers continue to spend on discretionary items.
Investing in sector ETFs like communications, financials, and consumer discretionary requires understanding the industries within each sector. By analyzing key components, investors can anticipate sector performance based on individual company outcomes. It’s important not to time the market when investing in sectors, as focusing on long-term potential and diversification through low-cost ETFs is a safer approach.
Board of directors. American Express is an advertising partner of Motley Fool Money. Daniel Foelber has positions in Nike, Starbucks, and Walt Disney and has the following options: long January 2025 $70 calls on Nike. The Motley Fool has positions in and recommends Alphabet, Amazon, Bank of America, Berkshire Hathaway, Goldman Sachs Group, Home Depot, JPMorgan Chase, Mastercard, MercadoLibre, Meta Platforms, Netflix, Nike, Starbucks, Tesla, Vanguard S&P 500 ETF, Visa, and Walt Disney. The Motley Fool recommends Comcast, General Motors, and Lowe’s Companies and recommends the following options: long January 2025 $25 calls on General Motors, long January 2025 $370 calls on Mastercard, and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
