Executive Edge

This is the best S&P 500 stock market sector to own during the summer, according to recent history

Key Points
  • Three sectors within the S&P 500 Index have generated average gains above 3% during the three-month summer trading period since 2010.
  • All sectors except energy have posted positive returns, but utilities are second only to technology stocks and have posted summer gains with the most consistency.

In this article

  • .DJI
  • .SPX
Why summer could mean a strong performance for utilities sector
Why summer could be strong for utilities sector

Investors may be looking at last week's late volatility, and the disturbing events around the U.S. over the weekend, as a reason to take profits on recent gains made as the market soared back from the coronavirus low point in late March. Playing it more conservative as the summer begins is a reasonable strategy, especially with fears about what could occur in a second coronavirus wave as the economy reopens. But it could be a mistake to overlook more conservative stocks in one big sector of the market: utilities. 

The utilities sector within the S&P 500, tracked by the Utilities Select Sector SPDR ETF, has not been one of the biggest rebound sectors as stocks bounced back. The utility sector is still more than 15% off its most recent 52-week high. That's very different from the situation in technology, with tech stocks now roughly 5% off their 52-week high after a huge run. For investors worried that big tech may be fully valued, utilities may be a good place to consider sector rotation during the summer.

The utilities sector of the S&P 500 has had the second-best performance behind tech during summers since 2010.

Utility stocks have posted big numbers during June, July and August months since 2010, and the most consistent gains of any S&P 500 sector, according to data from Kensho, a hedge fund trading data platform. In nine of the past 10 years, the utilities sector has posted a positive return during the summer, the best percentage of any sector. Its average return, of 3.27%, is also second among all sectors, barely trailing tech's average return of 3.28%, which is tradable in the Technology Select Sector SPDR ETF. 

Utility stocks did see large gains in the extended bull market that came before the coronavirus crash, and there were concerns the sector was overvalued as the stock market hit record highs. In fact, since U.S. economic growth peaked in the second quarter of 2018, utilities had been the best-performing sector of the market. 

If utilities spike during the summer, it would not be the first big run for the sector this year, as it started 2020 very strong, gaining 6.61% in January, when it far surpassed the S&P 500 as well as the tech sector's return.

Low interest rates, low energy prices and tax cuts have allowed utilities to invest in upgrades without raising customer bills, while the low-interest rate environment has favored the defensive dividend sector as an alternative to fixed-income. 

One popular ETF strategy that aims to limit equity market risk, the Invesco S&P Low Volatility ETF, recently rotated out of some big utility stocks and increased its exposure to growthier tech stocks. Its portfolio is reallocated based on the stocks with the lowest volatility over the preceding 12 months.

Utilities has not seen as strong a rebound as tech since the March crash.

Only three sectors have posted returns above 3% during summers since 2010, with health care, tradable in the Healthcare Select Sector SPDR ETF, just behind tech and utilities. Health care also has a more defensive equity profile than tech and is a sector investors often turn to when they want to play it safer in the stock market, but like tech, health-care stocks have had more of a recent run, with the sector now only 3% off its most recent 52-week high. Health-care is the largest sector weighting in the Invesco S&P Low Volatility ETF, at over 25%.

Every sector of the market has posted an average return that is positive during these summer months, and other sectors might be worth a look with tech gains coming so quickly, but recent market history has not been kind to the market's biggest dog: energy. The energy sector is still near-40% off its most recent annual sector high, but it is the only S&P 500 sector to post an average return that is negative across the past decade of summers.

A broad bet on the S&P 500 as a whole has been positive in these periods with such solid performance across the majority of sectors, with an average return of 1.60% during the summer, and the S&P has traded positive in 7 of the past 10 years, according to Kensho data. The Dow Jones Industrial Average, meanwhile, has posted an average return of 1.33% over the past decade of summers, positive 60% of the time.