Meet Vanguard's 3 Hottest Sector ETFs in 2024 (and None of Them Are Tech)

The major stock market indexes had a rip-roaring first half of the year before screeching to a grinding halt in July. The sell-off across market-leading sectors like technology contributed to the S&P 500's worst-performing July in the past 10 years. And then came a 3% pullback on Aug. 5.

As of market close on Aug. 6, the three best-performing stock market sectors year to date (YTD) are now utilities, communications, and financials. And Vanguard has a low-cost exchange-traded fund (ETF) for each sector.

Here's a quick look at the pros and cons of each sector and the benefits of using Vanguard sector ETFs to gain exposure to a particular theme.

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1. Vanguard Utilities ETF

The Vanguard Utilities ETF (NYSEMKT:VPU) is trouncing other Vanguard sector ETFs, the Nasdaq Composite, and the S&P 500 YTD.

VPU data by YCharts

The utility sector tends to be one of the safest sectors in the market and is chock-full of dividend-paying value stocks. Utilities, especially regulated ones, benefit from stable and predictable cash flows and are resistant to recessions. Demand for their services isn't as correlated to the ebbs and flows of the economy as, say, consumer discretionary companies or industrials.

Investors gravitate to utilities for their passive income potential and consistency. This level of outperformance from the sector is rare. But the big year makes more sense if we dig deeper and examine the sector's valuation and past results.

Even after the recent run-up, the sector sports a mere 22.5 price-to-earnings (P/E) ratio -- which is lower than other "safe" sectors like healthcare and consumer staples.

In the three-year period from 2021 to the end of 2023, the Vanguard Utilities ETF was essentially flat, while the S&P 500 was up 27%. Years of underperformance, paired with investors looking for value and safe stocks amid a frothy market, could be why the utilities sector is having its time in the sun in 2024.

With a 3.1% yield and 0.1% expense ratio, the Vanguard Utilities ETF is a great way to invest in the sector and could be a particularly good buy if you're looking to generate reliable passive income.

2. Vanguard Communication Services ETF

The Vanguard Communication Services ETF (NYSEMKT:VOX) has been on a roller-coaster ride over the last few years. This was the worst-performing sector in 2021, 2022, and the three-year period from 2020 through the end of 2022. Then, it soared 43% in 2023 and was the best-performing sector in 2024 through the end of May.

The communications sector is unique because it offers a mix of value, income, and growth stocks. Google parent company Alphabet and Meta Platforms make up a combined 43% of the communications sector weighting in the S&P 500. But the sector also includes traditional media companies like Comcast, telecommunications companies like Verizon and AT&T, pure-play streaming companies like Netflix, and even digital advertising companies like The Trade Desk.

The blend of social media and traditional media and legacy entertainment giants and newcomers makes the communications sector arguably the most balanced sector in the market. What's more, Alphabet and Meta Platforms are relatively inexpensive stocks compared to other big tech-orientated companies. Both of them have lower P/E ratios than the S&P 500 and Coca-Cola. In fact, the Vanguard Communications ETF has a slightly lower P/E than even the utilities sector, since many linear network companies and telecommunications companies have dirt-cheap valuations.

The ETF only has a 0.9% yield, so it's not as good of a choice if you're looking for more passive income. But it could be worth a closer look if you prefer a balance of growth and value. Like the Vanguard Utilities ETF, the Vanguard Communication Services ETF sports just a 0.1% expense ratio, or $1 in fees for every $1,000 invested.

3. Vanguard Financials ETF

When you think of the financials sector, big banks like JPMorgan Chase and Bank of America may come to mind. And while those are some of the largest holdings in the Vanguard Financials ETF (NYSEMKT:VFH), diversified banks only make up 21.3% of the holdings.

Transaction and payment processing service companies like Visa, Mastercard, and American Express have become a major part of the sector due to the transition from cash to digital and mobile payments and the simple yet effective business model of collecting revenue whenever a card is swiped or tapped.

Insurance companies, exchanges, and asset management companies also make up a sizable portion of the financial sector.

In general, the sector benefits from a strong and internationally interactive economy. But it can also do well if investors are gravitating toward value. The Vanguard Financials ETF has just a 14.8 P/E ratio and a 1.8% yield since many big banks and regional banks tend to have inexpensive valuations. The sector has a strong balance of value and income.

The Vanguard Financials ETF is a good choice if you don't have a compelling reason to choose Visa over Mastercard, Goldman Sachs over Morgan Stanley, etc.

Making ETFs work for you

Although the utilities, communications, and financials sectors have little in common, their discounted valuations compared to the S&P 500 offer a clear reason why investors may gravitate toward them during times of uncertainty.

If one of these sectors stands out, you may want to examine the allocation more closely so you know exactly what goes into each ETF's composition.

One approach could be to pair sector ETFs with individual holdings if you want a blend of diversification and a higher weighting in a company you like. For example, the dominance of Alphabet and Meta Platforms means that Netflix has just a 4.5% weighting in the Vanguard Communications Services ETF. So, if you want more exposure to Netflix, a two-pronged approach of buying the ETF and individual shares could better fit your objectives.

In sum, Vanguard sector ETFs can be simple, plug-and-play ways to invest money in the market while achieving instant diversification and keeping fees at bay.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Bank of America, Goldman Sachs Group, JPMorgan Chase, Mastercard, Meta Platforms, Netflix, The Trade Desk, and Visa. The Motley Fool recommends Comcast and Verizon Communications and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.