With 2010 almost at its end, and with 2011 around the corner, it's not too soon to start thinking about reworking the true, long-term 'core' holdings for your portfolio. And what should this foundational level of the coming year's portfolio look like? If history is any guide - and it typically is - then one of 2010's laggards may well be one of 2011's (and beyond) winners.
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Sector Rotation Right on Cue
The 2003 rebound, for all intents and purposes, was a textbook one. Whether you're John Murphy, a Standard & Poor's analyst, or one of a couple of other sector rotation theorists, you agree that technology stocks should outperform other sectors in early bull markets, right at the economic trough. And sure enough, tech stocks did just that in 2003. The iShares Technology Fund (NYSE:IYW) topped all other major sector funds that year with its 48% return.

Luck of the draw? Fluke? Maybe, but the same iShares fund also led the way out of the most recent recession, by gaining 68% in 2009. That was a tie with the iShares Basic Materials Fund (NYSE:IYM), which was red hot at the time, even if artificially. Plenty of stimulus dollars and low interest rates were drawing people into those areas like there was no tomorrow, somewhat similar to 2004 when the fund outpaced the market with its 12% advance.

And interestingly enough, according to the theories, the basic materials sector is an area that is expected to do well in an early expansion/middle bull phase, which it's done twice now.(For related reading, see Sector Rotation: The Essentials.)

The Forgotten Sector
What does any of this have to do with today? A lot, if 2004 through 2006 (the heart of the last expansion phase) is any guide. In 2004, the iShares Energy Fund (NYSE:IYE) won the race with its 31% gain. In the number two spot was the iShares Utilities Fund (NYSE:IDU), with a 20% advance. In 2005, the energy ETF knocked it out of the park again with a 40% gain. Rolling in at the number two spot was the utilities fund again, with a 13% rally. In 2006, the iShares Telecom Fund (NYSE:IYZ) was the big winner with its 26% gain. In second? The iShares Utility Fund, with a 14% move for the year.

You get the idea. It may have always been a bridesmaid and never a bride, but it was a bridesmaid for three years running, and ended up being the second-biggest winner among all sectors for that stretch. Yes, you read that right - utilities outperformed everything except energy between early 2004 and late 2006. It's unlikely that anybody saw it coming, especially considering its weak performance in 2003.

The Bottom Line
Undoubtedly, some of that leadership from the utility sector stemmed from the stunning rise in oil and gas prices in 2004 and 2005, which indirectly translated into better margins for utility providers. A great deal of the sector's success during that time, however, has to be attributable to the sheer growth in demand fueled by an economic rebound. If investors are really believers in the current economic rebound, tepid though it may be, then history says the utility stocks are great long-term bets right now even if it doesn't feel like they are.

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