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The two best-performing sectors in the market tell very different stories: Strategist

The top-performing sectors in the S&P 500 (^GSPC) so far this year are an unlikely pair.

The Information Technology and Utilities sectors have led advances in the blue-chip index for the year to date, advancing 10% and 8%, respectively.

For the Information Technology sector, that leadership marks a repeat performance. The sector outperformed in 2019, gaining 48% for its best return since 2009. That sector comprises technology hardware and semiconductor companies, along with additional tech software and services corporates.

But for the Utilities sector, 2020 has so far represented a marked improvement in sector rank versus last year. In 2019, the Utilities sector – which include electric, natural gas and water utilities companies – was the eighth best-performing sector in the S&P 500 with a 22% return, underperforming against the broader market’s 29% gain. In 2019, the Communication sector, which includes internet tech giants like Facebook (FB) and Google-parent Alphabet (GOOG, GOOGL), had posted the second-best returns after Information Tech.

“It’s not just confined to the big, well-known tech names” coming out on top this year, Liz Ann Sonders, chief investment strategist for Charles Schwab, told Yahoo Finance. “It’s a bit of a bifurcation in terms of what investors are looking for.”

“There's that component of money that wants to chase that momentum, that likes the growth characteristics associated with [tech],” she said. “But there's also, I think, sort of a cohort or a pool of money that is looking for yield, looking for income, especially in this recent period where you've seen the move back down in the 10-year yield.”

Two railways tracks merge close up.

The Utilities sector offers investors a dividend yield of about 2.9%, according to Bloomberg data. That exceeds the dividend yield of the S&P 500 as a whole, at about 1.79%. The yield on the benchmark 10-year Treasury note was less than 1.6% as of Thursday.

“I think we're back in that mode on the part of investors of sort of desperation for yield at kind of any cost,” Sonders said.

Utility stocks also provide investors a more defensive positioning in case of a downturn, given these companies’ track records of keeping revenue and earnings intact even when economic or market conditions deteriorate.

At the same time, investors looking to the Utilities sector as a default value play and a hedge against a pullback in richly valued U.S. equities, may be misguided, Sonders added.

“There's an important difference between the fundamentals of growth and value and the index labels of growth and value,” Sonders said. “Utilities are still housed in most of the value indexes, depending on what tracker you're looking at. But right now, because of how well they've done, it's actually hard to argue that they offer a lot of fundamental value. They're fairly rich from a valuation perspective.”

“So I think it's really important for investors to ... differentiate between, are we talking about the fundamentals of growth and value, or the index labels of growth and value?” she said. “Those are often very different things.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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