Is your portfolio exposed to the best sectors?

At around 5,350 points the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) remains a long way below its record high of over 6,700 points hit way back in 2007. It has recovered around 17% in the last five years.

Drilling down deeper reveals that there has been a big range in performance in the underlying sectors. The following chart shows their relative price returns over 1 and 5 year periods.

sectors2 Data source: Google Finance (price returns only)

Stocks in the S&P/ASX 200 Health Care (Index: ^AXHJ) (ASX: XHJ) index have dominated, up 157% in the last 5 years, 18.7% in the last 12 months, and 10.7% year to date.

It is the only ASX sector index which is now trading near an all-time high.

Investors have been drawn to the defensive nature of health care companies. Further, sector leaders such as CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC) have generated record profits on the back of a weak Australian dollar and international exposure.

In my view, the strength in health care stocks is likely to continue, and long-term investors should aim to have adequate exposure to take advantage of their growth and industry tailwinds.

The S&P/ASX 200 Telecommunications Services (Index: ^AXTJ) (ASX: XTJ), S&P/ASX 200 Utilities (Index: ^AXUJ) (ASX:XUJ) and S&P/ASX 200 A-REIT (Index: ^AXPJ) (ASX: XPJ) indices have also performed well, with these sectors offering attractive yields in an environment of low interest rates.

Given weak commodity prices, it is no surprise to see that the S&P/ASX 200 Materials (Index: ^AXMJ) (ASX: XMJ) Index and S&P/ASX 200 Energy (Index: ^AXEJ) (ASX: XEJ) Index have been the worst-performing sectors over both 1 and 5 years.

However, the materials sector has recently rebounded and it is currently the best performing sector year to date, up over 16%, with BHP Billiton Limited (ASX: BHP) recovering 7%, and gold producer Newcrest Mining Limited (ASX: NCM) up 70%.

A quick glance at the above table should be enough to convince you that being exposed to the best sectors, and avoiding the worst ones will have a large impact on returns.

Investing in a broad index fund such as Vanguard’s V300AEQ ETF UNITS (ASX: VAS) is one way to ensure your portfolio is exposed to all key sectors. However, due to the dominance of the financials and materials industries in Australia, exposure to these two sectors currently accounts for around 60% of the fund. Health care represents only 6.8% of the portfolio, and information technology just 1.2%.

With this in mind, it is possible to build a more balanced portfolio or target strategic exposure to sectors through a diversified group of direct share investments, or a combination of holdings in index funds and individual companies.

Buying shares in the strongest businesses in the most promising sectors when valuations are reasonable will reward investors with strong capital gains and dividends.

Discover The Motley Fool's top 5 ASX dividend stock ideas for 2016 to get you started building a more diversified income portfolio that is paying you back! Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Matthew Bugden has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.