One of the most common ways investors think about a company and analyze their portfolio diversification is by sector. There are 11 main sectors used by the S&P and MSCI in their popular Global Industry Classification Standards (GICS), which was started in 1999 to offer investors a standardized way to segment the market.
From these 11 main stock market sectors, the market is further divided by GICS into 24 industry groups, 69 industries, and 158 sub-industries. These are the categories that break up the common investment fund products, but certain ETF products get granular and focus on specific sub-industries.
For the average retail investor, the 11 main sectors will be enough to judge the diversification of one’s investment portfolio, but it is important to keep in mind that there are further sub-industries and that exposure within a certain sector might be concentrated heavily within a specific sub-industry.
Getting to Know the Market Sectors
As we introduce each sector, we will discuss its economic drivers and cyclicality while also listing the industry groups or sub-industries that make up each sector.
|Consumer Discretionary||Communication Services||Consumer Staples|
As an economically cyclical sector, Consumer Discretionary businesses operate selling non-essential goods and services. As such, the Consumer Discretionary sector can also be referred to as the consumer cyclical sector. The Consumer Discretionary sectors thrive in high growth environments where consumers have lots of excess disposable income to spend on aspirational purchases.
Industry Groups included in the Consumer Discretionary sector are Consumer Durables and Apparel, Retailing, Consumer Services, and Automobile and Components.
In September 2018, the former Telecom sector was retired in favor of a new, broader sector, named Communication Services. The new Communication Services sector includes not only companies that provide telecommunication services through fixed-line, wireless, and fiber-optic cables, but also now includes companies that create and aggregate entertainment content and information which is then consumed over the various telecommunication networks.
Industry Groups included in the Communication Services sector are Telecommunication Services and Media and Entertainment.
Businesses that are focused on selling consumers essential products that are non-durable and consumed regularly fall into the Consumer Staples sector. This sector is less economically cyclical than the Consumer Discretionary sector given the essential and regular use of the products and services.
Industry Groups included in the Consumer Staples sector are Food, Beverage, and Tobacco, Food & Staples Retailing, as well as Household & Personal Products.
Just as it sounds, the sector has to do with the extraction, transfer, supply, and consumption of energy. The rise of green energy means that the classic oil and gas producers are seeing solar and wind utilities take a higher share of the sector weighting.
The Energy sector contains only one Industry Group, Energy, but does contain further sub-industries including Energy Equipment & Services and of course Oil, Gas, & Consumable Fuels.
Money lending occurring from banks and also the investment of funds by wealth management firms would both be considered financial services. Insurance companies also hold an important role in the Financial sector’s weighting due to the natural economic need to transfer and share financial risks.
Given lots of the financial sector’s profits are driven by loans and mortgages, changes in interest rates and spreads along the yield curve can have cause swings in profits. Industry Groups within the Financials sector include Banks, Insurance, and Diversified Financials.
Focused on keeping us well, the Health Care sector is relatively more stable than other sectors. The Health Care sector is driven by the size and age of populations as well as the standard of living. Because of these factors, the Health Care sector is unique in that it has both growth and stability qualities given aging populations and it being an essential service.
There are three Industry Groups within the Healthcare sector including Pharmaceuticals, Biotechnology and Life Sciences as well as Healthcare Equipment and Services.
As a generally cyclical sector, Industrials are the economically sensitive manufacturers, construction, and other professional services. Conglomerates are common in the industrial sector due to synergies being obtained from being active in various parts of the production chain.
Industry Groups within the Industrials sector include Capital goods, Commercial and Professional Services, as well as Transportation. The variety of the Industrial sector is deep with another dozen sub-industries such as defense and even trading companies and distributions.
The Information Sector (IT) is involved in the development of software, electronic design and manufacturing, as well as all the accompanying services. The information technology sector goes through many revolutions and is often a place for investors to find quick-growing companies with new innovative ideas. Innovation has downside effects too, with some companies not lasting over the decades if they are not able to keep up.
The IT sector is comprised of the industry groups Software & Services, Technology Hardware & Equipment, and Semiconductors & Semiconductor Equipment.
Commodities that are not energy-related will fall into the Materials sector. The sector is broad and includes not only the raw production of commodities but also the refining and chemical processes used to transform various types of materials for final consumption. Given materials are often at the foundation of making goods and products, the sector is highly cyclical with revenues vulnerable to economic swings.
There is only one industry group, Materials, but there are lots of sub-industries including Metals & Mining, Chemicals, Construction Materials, Containers & Packaging, and lastly Paper & Forest Products.
Since putting a roof over your head is pretty essential, the Real Estate sector is relatively more stable than other sectors. The Real Estate sector has two sub-industries; Equity Real Estate Investment Trusts and Real Estate Management & Development.
In addition to steady rent income, the Real Estate industry also benefits from capital appreciation (if you own the buildings that is!). There are many different property types including Residential, Multi-Family, Commercial, Industrials, Retail, and Land.
The Utility sector is relatively stable due to the core base level of private household utility needs before adding on the more cyclical commercial clients. Also, the large physical assets in some utility businesses lead to similarities with rent characteristics in a subscription type of service. The Utility sector has various sub-industries such as Electric, Gas, Water, Multi-Utilities, and Independent & Renewable Electricity Producers.
Take Away for Investors
The 11 sectors in the stock market all have different business characteristics and cyclical qualities. For investors, understanding your portfolio’s allocation across the sectors at various points in time is one way to help them assess risk in the portfolio and also attribute returns.