Technology stocks have dominated the stock market, and they make up more than one-third of the S&P 500. While the index’s largest holdings such as Nvidia, Apple and Microsoft tend to get the attention for their growth potential, there are tons of stocks in other industries that can offer generous returns.
Often, the stocks that you see in the headlines have lofty valuations, making them vulnerable during market corrections. That’s why some investors gravitate toward stocks that may be seen as more boring, but that can still beat the S&P 500 and tend to experience less volatility.
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Overlooked sectors beating the S&P 500
Here are two overlooked sectors that provide these types of opportunities and can continue to produce gains during slower economic cycles.
Industrials and infrastructure
Industrial and infrastructure companies are the backbone of many of the organizational structures that support the economy. This sector includes aerospace, heavy machinery, data center construction, electric utilities and other essentials. Many mature companies in this industry have high yields and low volatility, which is a good combination for investors and especially retirees who may be trying to stay away from higher-risk sectors.
Industrials make up roughly 9% of the S&P 500. Many of these companies are durable and offer dividends.
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Consumer staples
Shoppers may be able to give up on their tech purchases when they're facing financial hardships, but they’re still going to buy food, beverages, home care products and other essentials. That’s why consumer staples can generate consistent revenue, even when the rest of the stock market is struggling.
Businesses in this sector have pricing power and can often hike prices in line with inflation. The consumer staples sector may not outrun the S&P 500 during a bull market, but it often offers insulation from market corrections. Many consumer staples picks also offer dividends, which translates into meaningful cash flow.
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How to incorporate these sectors
Review your asset allocation. It’s common for investors to pursue growth stocks with strong momentum, and many of those same companies are in the tech sector. However, putting too many of your eggs in one basket can leave your portfolio vulnerable during a market correction.
Investors who are heavily concentrated in tech may want to consider diversifying into lower-volatility sectors like industrials and consumer staples. That way, your portfolio ideally won’t drop as much during corrections, and these same stocks can provide higher yields than the biggest tech companies.
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Investors can look for individual stocks in each of these sectors by reviewing the S&P 500’s holdings across those industries. However, you can also buy exchange-traded funds (ETFs) that track the sectors you want to prioritize as you reconstruct your portfolio.
You don’t have to build your portfolio from the ground up if it isn’t diversified enough. However, it is smart to build a diversified foundation instead of putting all of your capital into flashy, high-risk stocks.
