The books are officially closed on 2021, a year in which a new president was inaugurated, and supply chain disruptions and soaring inflation were among the most frequently-discussed topics.

But the stock market did quite well in 2021. The S&P 500 returned 26.9% for the year, outperforming the Dow Jones Industrial Average by 8.2% and the technology-heavy Nasdaq Composite by 5.50%. That was the widest margin of outperformance by the S&P 500 against those benchmarks in a calendar year since 1997. Every S&P 500 sector notched a double-digit return for the year. Despite economic concerns, the stock market was rewarding for investors.

The energy sector continued its rebound from the pandemic lows of 2020. Oil and natural gas prices soared, and that benefited the companies that produce those commodities. The energy sector returned 53.3% for the year.

Most income-oriented sectors underperformed for the second straight year. The exception was real estate, which was the second-best sector performer with a return of 46.1%.

Let’s dissect the 2021 performance, sector-by-sector. Note that all returns discussed here are total returns, which include the effect of dividends paid during the year.

11 Sector Review

Select Sector SPDRs are targeted exchange-traded funds (ETFs) that divide the S&P 500 into 11 sector index funds. These sectors are Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Materials, Real Estate, Technology, and Utilities. The 11 Select Sector SPDRs represent the S&P 500 as a whole.

The Energy sector was the top performer in the first half on 2021, but it was in correction mode early in the summer. A resurgence that started in September helped push the Energy sector to the top spot for the year with a total return of 53.3%. However, the Energy sector lagged during the fourth quarter, gaining 7.9% versus an S&P 500 return of 10.6%. Chevron (NYSE: CVX), ConocoPhillips (NYSE: COP), EOG Resources (NYSE: EOG), and Schlumberger (NYSE: SLB) are major components of the energy ETF.

The Real Estate Index was the top performer in Q2 and Q4, and was the year’s second-best performer with a return of 46.1%. This index consists primarily of real estate management and development companies and real estate investment trusts (REITs). The sector was down in 2020 because of the pandemic, but it has been one of the top-performing sectors in 2021, returning 25.6% YTD. Simon Property (NYSE: SPG) and American Tower (NYSE: AMT) are among the largest representatives of this group.

The Financial sector lagged in Q4 after four consecutive strong quarters. But that was still enough to make it the third best-performing sector of the year with a return of 34.8%. In addition to banks, this group includes financial services firms, insurance companies, and consumer finance companies. Major companies include Berkshire Hathaway (NYSE: BRK.A, BRK.B), JPMorgan (NYSE: JPM), and Citigroup (NYSE: C).

We often see Technology at the top of the heap, but it fell to fourth among all sectors in 2021 with a return of 34.7%. However, it was the second-best performing sector in Q4. This sector includes technology hardware, storage, and peripherals; software; communications equipment; semiconductors and semiconductor equipment; IT services; and electronic equipment. Components of this ETF include Apple (NSDQ: AAPL), Microsoft (NSDQ: MSFT), and Intel (NSDQ: INTC).

After underperforming the S&P 500 for two consecutive quarters, the Consumer Discretionary sector has now beaten the S&P 500 for two consecutive quarters. For the year, it was the 5th best performer with a total return of 27.9%. This sector includes industries such as automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media, and retailing. It is comprised of companies such as Amazon (NSDQ: AMZN), Home Depot (NYSE: HD), and Walt Disney (NYSE: DIS).

The Materials sector was the final sector to outperform the S&P 500 with a total return of 27.4%. The sector was also the third-best performer in Q4. This sector includes companies that produce chemicals, construction materials, metals and mining, and paper and forest products. Among its largest components are DowDuPont (NYSE: DWDP) and Sherwin-Williams (NYSE: SHW).

The Health Care sector continues to grapple with issues related to COVID-19. One the one hand, many people are seeking healthcare, but some of the more lucrative elective procedures continue to be postponed. In 2021, the sector slightly underperformed the S&P 500 with a total return of 26.0%. However, the sector slightly outperformed the benchmark in Q4. The Health Care sector includes health care equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries. Bellwethers in the health care sector include Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE).

The Industrials sector has underperformed in a couple of quarters this year, including Q4. However, the sector still turned in a nice 2021 return of 21.1%. Component industries include aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, and machinery. Important constituents of this sector include Boeing (NYSE: BA), 3M (NYSE: MMM), and Honeywell (NYSE: HON).

After underperforming for most of the year, the Utilities sector began to climb back near the end of the year. The sector outperformed the S&P 500 in Q4, but underperformed for the year with a total return of 17.7%. The main headwinds for the sector continue to be inflation fears and fear of rising bond rates. Companies that produce, generate, transmit or distribute electricity or natural gas predominantly make up the Utilities sector. Component companies include NextEra Energy (NYSE: NEE), Duke Energy (NYSE: DUK), and Dominion (NYSE: D).

Not far behind was the Consumer Staples sector with a 2021 return of 17.2%. Making up this sector are companies involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products, and personal products. Component stocks include Procter & Gamble (NYSE: PG), Philip Morris International (NYSE: PM), and Coca-Cola (NYSE: KO).

Communication Services was the only sector to turn in a negative return in Q4, and that helped draft the sector into last place for 2021. Still, a 16.0% return in 2021 for last place isn’t too bad. This sector includes diversified telecommunication services, wireless telecommunication services, media, entertainment, and interactive media & services. Components include Facebook (NSDQ: FB), Alphabet (NSDQ: GOOGL), and AT&T (NYSE: T).

In summary, it’s hard to find much to complain about. Every sector was a winner, and the S&P 500 turned in a performance far above its historical long-term annual average of 9.8%.

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