Why Are These 3 Vanguard ETFs Underperforming the S&P 500 Since Election Day?

The S&P 500 rallied in the wake of last week’s election results, climbing 3.8% since Nov. 5 at Wednesday’s prices. But not every stock market sector joined in.

Investment management firm Vanguard offers low-cost exchange-traded funds (ETFs) that track the performance of each of the 11 sectors that make up the stock market under the Global Industry Classification Standard. Each of these funds has an annual expense ratio of 0.1%, charging just a dime for every $100 invested — making them inexpensive ways to target any sector that you are particularly interested in.

Here’s why the Vanguard Utilities ETF (VPU 0.77%), Vanguard Consumer Staples ETF (VDC -0.46%), and Vanguard Health Care ETF (VHT -1.87%) have been lagging the S&P 500 since the election results and whether any of these ETFs are worth buying now.

1. Vanguard Utilities ETF

The Vanguard Utilities ETF finished September up 27% year to date (YTD), making it the best-performing Vanguard sector ETF at the time. But the fund pulled back in October, likely due to valuation concerns, and it’s down slightly since election day.  At Wednesday’s prices, the fund was up 23% YTD, slightly underperforming the S&P 500’s 26% gain.

The stock market hates uncertainty, so utilities were a natural choice for jittery investors in search of relatively safe investments. The majority of the Vanguard Utilities ETF’s holdings are in regulated electric utilities. These companies work with government agencies and regulators to set the prices the charge, which limits their growth potential but produces steady cash flows. This predictability is great for paying growing dividends.

Electric, natural gas, and water utilities benefit from population growth and higher resource consumption, which can make them long-term winners. But utilities don’t have the cyclicality of sectors like industrials or financials, which produced big gains after the election results because they could benefit from less regulation and the onshoring of industrial production and manufacturing.

In addition, lower interest rates would benefit the utility sector. Many utilities have highly leveraged balance sheets because they have funded capital-intensive projects to diversify their exposure to renewable energy. An administration that is more pro oil and gas and offers fewer incentives to renewables could make these investments less appealing.

All told, the sell-off in the utilities sector makes sense. However, the Vanguard Utilities ETF could still appeal to passive income investors because it yields 2.9%.

2. Vanguard Consumer Staples ETF

Top holdings in the Vanguard Consumer Staples ETF include familiar names like Procter & Gamble (PG 1.38%), Costco Wholesale (COST -1.37%), Walmart (WMT 0.14%), and Coca-Cola (KO -1.37%). Not long ago, all four of those stocks were hovering around their all-time highs. But some leading consumer staples companies, including P&G and Coke, have pulled back after reporting disappointing earnings and falling sales volumes. Meanwhile, Walmart and Costco have crushed the market year to date, up 59.6% and 38.4%, respectively. As of midday Wednesday, the ETF was up just 0.2% since election day.

The Vanguard Consumer Staples ETF could be sinking due to the challenges faced by major holdings like P&G and Coke and the now-stretched valuations of companies like Walmart and Costco. Another reason could be that investors are shifting assets into more growth-orientated companies in response to the election results. Like utilities, consumer staples benefit from higher consumption and a growing population, but they don’t have nearly the growth potential of cyclical sectors like industrials, consumer discretionary, or financials.

With a 2.6% yield, the Vanguard Consumer Staples ETF remains a solid source of passive income, making it worth considering for risk-averse investors. However, it’s worth noting that two of the ETF’s top 10 holdings are tobacco-focused companies, Philip Morris and Altria Group. Investors who don’t feel comfortable in those names may prefer to individually pick top high-yield consumer staples stocks instead.

3. Vanguard HealthCare ETF

The composition of this healthcare sector fund has changed noticeably in recent years — namely due to the major market cap gains of drugmaker Eli Lilly (LLY -4.14%) and insurance giant UnitedHealth Group (UNH -0.06%). Combined, those two companies now make up nearly 20% of the Vanguard Health Care ETF — eclipsing former industry leaders like Johnson & Johnson.

The healthcare sector is unusual because it includes growth-focused biotech firms as well as stodgy dividend-paying value stocks like Merck.

Healthcare policy is a major topic of conversation among both leading U.S. political parties. The sector’s underperformance may be simply due to uncertainty regarding how new policies could impact it. Major moves by top healthcare holdings are also having an impact.

Eli Lilly stock has fallen by more than 12% since the company reported its third-quarter results on Oct. 30. Merck has been tumbling for months and is hovering around a 52-week low. Meanwhile, UnitedHealth and Intuitive Surgical surged to all-time highs recently after blowout quarterly reports.

All told, it’s a mixed bag in the healthcare sector right now, and this ETF is down 0.3% since the election. While it remains a great way to invest in the broader sector, some investors may prefer to target a certain industry or mix of companies rather than buying the ETF. For example, risk-averse investors may prefer to own less expensive, higher-yield names, while risk-tolerant investors may prefer to pick up shares of faster-growing biotech companies even if they are trading at premium valuations.