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Which ASX sector generates the best returns?

With the S&P/ASX200 (ASX: XJO) index yesterday closing at 6,697 points (just shy of the all-time high hit in July), it’s safe to say we are seeing stocks at robust and healthy valuations across the board.

Although for anyone with a healthy amount of capital in the markets, this is excellent news, it’s not quite such a happy time for those looking to start out in investing or with cash on the sidelines looking for a home.

If you’re one of those people unfortunately stuck in the latter group, it might be useful for your decision making to know where the best returns have come from on the stock market over the past year.

So, here are all 11 of the ASX’s sub-indexes (also called sectors or GICS) and their performance (based on yesterday’s closing prices) over the last 12 months, according to marketindex.com.au.

Communication Services (ASX: XTJ) – 12.4%

Communications lists all companies that make their crust from assisting the transmission of information. By far the most dominant company in this index is Telstra Corporation Ltd (ASX: TLS), but we also have some smaller telcos like TPG Telecom Ltd (ASX: TPM) and Vocus Group Limited (ASX: VOC). Additionally, advertising companies like Carsales.com Ltd (ASX: CAR) and REA Group Ltd (ASX: REA) are also present, as are media companies like Nine Entertainment Holdings Ltd (ASX: NEC). Communications has returned 12.4% over the past year.

Consumer Staples (ASX: XSJ) – 17.1%

Consumer staples refers to companies who provide foods, drinks and everyday essentials we can’t live without – think Woolworths Group Ltd (ASX: WOW), Treasury Wine Estates Ltd (ASX: TWE), Inghams Group Ltd (ASX: ING) or Coca-Cola Amatil Ltd (ASX: CCL). These companies are often called ‘safer’ stocks by virtue of the inelastic nature of their products. Consumer Staples has returned 17.1% over the past year.

Consumer Discretionary (ASX: XDJ) – 16.6%

This sector includes companies that make consumer goods and/or provide services that are more sensitive to economic conditions (aka ‘wants’) than consumer staples (aka ‘needs’) – some examples would be Breville Group Ltd (ASX: BRG), Crown Resorts Ltd (ASX: CWN), Myer Holdings Ltd (ASX: MYR) or JB Hi-fi Ltd (ASX: JBH). Consumer discretionary stocks have returned 16.6% over the past year.

Energy (ASX: XEJ) – 4%

The Energy index houses resource companies that are in the business of extracting or processing specific commodities like coal, oil or gas that we use for energy. Some of its major holdings include Woodside Petroleum Limited (ASX: WPL), Beach Energy Ltd (ASX: BPT) and Whitehaven Coal Ltd (ASX: WHC). Energy has returned 4% over the past twelve months.

Financials (ASX: XFJ) – 7.6%

This one we should all be familiar with. Financials encompasses ASX companies that typically work in banking, insurance or the wealth advisory industry. Here we have our big four banks like Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), as well as other smaller banks like Bendigo and Adelaide Bank Ltd (ASX: BEN).

Joining the party are insurance companies like Insurance Australia Group Ltd (ASX: IAG) and financial managers/advisers like AMP Limited (ASX: AMP), Magellan Financial Group Ltd (ASX: MFG) and IOOF Holdings Ltd (ASX: IFL). Financials has returned 7.6% over the past year.

Healthcare (ASX: XHJ) – 34.8%

This sector is also fairly self-explanatory – companies that sell healthcare products and services. However, you can break it down further into healthcare equipment and service providers and more pharmaceutical-focused companies that concentrate on research and development of current and future medicine. Thus, this index comprises both large health players like CSL Limited (ASX: CSL) and Ramsay Health Care Limited (ASX: RHC) and smaller stocks like Polynovo Ltd (ASX: PNV) and Clinuvel Pharmaceuticals Limited (ASX: CUV). The Healthcare index has returned 34.8% over the past year.

Industrials (ASX: XNJ) – 23.4%

Industrials index holds companies heavily focused on either manufacturing, transportation or provision of commercial goods or suppliers. This index is fairly broad, and covers anything from making car parts to printing, cleaning services and infrastructure.

You might know some of the larger companies in this index, like Sydney Airport Holdings Pty Ltd (ASX: SYD), Cleanaway Waste Management Ltd (ASX: CWY) or Qantas Airways Limited (ASX: QAN) but there’s also some smaller companies such as Qube Holdings Ltd (ASX: QUB). Industrials has returned 23.4% over the past twelve months.

Information Technology (ASX: XIJ) – 18.8%

This is probably the sector most growth investors would be fairly familiar with. Information Technology basically includes everything that can be related to either computer/smart device equipment, software or the internet.

This index contains the famous WAAAX stocks such as WiseTech Global Ltd (ASX: WTC), Afterpay Touch Group Ltd (ASX: APT) and Xero Ltd (ASX: XRO), as well as some other high-flyers like Nextdc Ltd (ASX: NXT) and Nearmap Ltd (ASX: NEA). Information Technology has given back a 18.8% return over the past year.

Materials (ASX: XMJ) – 16%

Put simply, this index contains companies involved in the extraction and processing of raw materials. Most prominently, we have the big miners like BHP Group Ltd (ASX: BHP), South32 Ltd (ASX: S32), Rio Tinto Limited (ASX: RIO) and Newcrest Mining Limited (ASX: NCM).

However, we also have secondary processors like Boral Limited (ASX: BLD), Brickworks Ltd (ASX: BKW) and CSR Limited (ASX: CSR), who make basic value-added products like bricks and cement from raw mined commodities. The Materials index has returned 16% over the past 12 months.

Real Estate (ASX: XRE) – 20.86%

Again, a fairly self-explanatory index, XRE holds companies that primarily operate in the property/real estate business and gain income from land assets. Some examples include Stockland Corporation Ltd (ASX: SGP) and Scentre Group (ASX: SCG) – owner of the Westfield brand of shopping centres. Real estate has returned 20.86% over the past year.

Utilities (ASX: XUJ) – 10.7%

Last but not least is the utilities index. Here we have companies that provide electricity, gas and water as a service, often via their own large-scale infrastructure. Some prominent names in this index are AGL Energy Limited (ASX: AGL), Spark Infrastructure Group (ASX: SKI) and APA Group Ltd (ASX: APA). Utilities has returned 10.7% over the past twelve months.

Foolish takeaway

There you have it – all 11 sectors of the ASX and their yearly returns. Of these, we can see that real estate, health care and industrials were the best performing sectors over the past twelve months, with healthcare taking the crown on a massive 34.8% gain.

However, don’t make the mistake of thinking that these 3 sectors are the best option to go with going forward. After all, past returns are no guarantee of future performance, to borrow a cliché. Rather than choosing a sector as a whole, I think the best way to build a balanced investing portfolio is finding the best companies from across a range of sectors. This way you get quality on top of diversity – not a bad combination.

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Sebastian Bowen owns shares of Telstra Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO, CSL Ltd., and WiseTech Global. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited, Nearmap Ltd., Sydney Airport Holdings Limited, Telstra Limited, and Treasury Wine Estates Limited. The Motley Fool Australia owns shares of Xero. The Motley Fool Australia has recommended Brickworks, carsales.com Limited, Nine Entertainment Co. Holdings Limited, Ramsay Health Care Limited, REA Group Limited, and Scentre Group. 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 Scott Phillips.