When you consider the best places to put your money to work as a stock market investor, it’s helpful to understand how and where various publicly traded companies generate revenue and earnings.
To that end, in 1999 two giants in the world of finance, Morgan Stanley Capital International MSCI and S&P Dow Jones Indices, created the Global Industry Classification Standard. Today GICS is the most widely used industry classification system, with the aim to effectively “capture the breadth, depth, and evolution of industry sectors.”
What Are Stock Market Sectors?
A stock market sector is a high-level grouping of publicly traded businesses that operate within the same general set of industries. Companies in these groups typically have similar characteristics, from business models to products and services, customer bases, cost structures, and margin profiles.
With thousands of individual stocks from which to choose, the GICS’ sector-based system helps investors compartmentalize stocks into easier-to-understand industries and sub-industries. To determine which sector and sub-industry each stock belongs to, the GICS is reviewed and revised annually, primarily using sources of revenue, but also considering earnings and even “market perception” as key “in determining a company’s principal business activity.”
How Many Market Sectors Are There?
There are 11 stock market sectors tracked by the GICS, including:
● Energy
● Materials
● Industrials
● Consumer staples
● Consumer discretionary
● Healthcare
● Financials
● Information technology
● Communication services
● Utilities
● Real estate
Definitions of the 11 Sectors of the Stock Market
Energy
The energy sector includes companies involved in oil, natural gas, and other consumable fuel (such as coal and ethanol). It also includes businesses that provide energy equipment and related services to those producers.
One surprising caveat: The energy sector does not include renewable energy companies, which are currently categorized under the utility sector. This might change in the future, however, according to a recent GICS press release on revisions to the system for 2023:
“Although there is a rapid growth in investment and capacity in the renewable energy generation space that is transforming the competitive landscape of both the Energy and Utilities Sectors, with renewable energy generation sources becoming significant competitors to traditional energy source providers, feedback from clients and additional internal analysis suggests that there is not a consensus yet on how to reflect these changes in the GICS structure. It is likely that this topic will be revisited in a future structure review by S&P DJI and MSCI.”
Materials
The materials sector includes companies that generate most of their revenue from producing and selling products used in manufacturing and other applications. This includes companies involved in chemicals, construction materials, containers & packaging, metals & mining, and paper & forest products.
Industrials
The industrials sector includes stocks related to the production and distribution of capital goods, typically those used in producing other goods rather than being purchased directly by consumers. These are stocks involved in aerospace & defense, building products, construction & engineering products, electrical equipment, machinery, trading & distribution, and other combinations of these sub-industries.
Consumer Staples
The consumer staples sector includes businesses that produce and distribute products that are regularly purchased by all consumers. These products are food, beverages (both alcoholic and non-alcoholic), tobacco, household products, and personal care solutions. As a result, this sector is generally unaffected by macroeconomic weakness or variance in consumers’ financial health.
Consumer Discretionary
By contrast, the consumer discretionary sector includes businesses that produce and distribute goods for which demand generally depends on a consumer’s financial status. These are products consumers might consider purchasing with excess funds (after allocating necessary spending to the consumer staples sector), including automobiles and related components, consumer durables (those that last at least three years, such as appliances, consumer electronics, and furniture), textiles, apparel, and other luxury goods. The consumer discretionary sector also includes leisure products and services, such as restaurant stocks, hotels, casinos, and other businesses in the leisure industry.
Healthcare
The health care sector includes companies that provide health care equipment and related supplies (including medical diagnostic tools and surgical supplies and equipment), health care providers, services (including insurance), and other technology related to the health care industry. The health care sector also covers companies in the pharmaceuticals, biotechnology, and life sciences spaces.
Financials
The financials sector is split into three primary sub-industries: banks, insurance companies, and diversified financial services businesses. The former two categories are arguably the most visible and widely followed by investors, though the latter category includes brokerage firms, consumer finance companies, and mortgage-related real estate investment trusts (which we’ll cover in more detail in the real estate sector section below).
Information Technology
The information technology sector includes companies in the software (and software services) industry, technology hardware and equipment, and semiconductors & related semiconductor equipment (i.e., chipmakers).
Given the vast array of other sectors and niches served and improved by information technology companies, inclusion in this sector can be somewhat subjective. But broadly speaking, regardless of the target sector niches of their products and services, information technology stocks either provide or enable technological solutions.
Communication Services
The communication services sector includes telecommunications companies (wireless telecoms and internet providers, for example), as well as media & entertainment businesses, the latter being involved in the production of movies, TV shows, video games, streaming services, social media platforms, audio communication and entertainment, and in-person events and entertainment.
Utilities
The utilities sector is comprised of companies that provide essential services, including electric, natural gas and water. Their customers include residential and commercial customers, as well as independent power companies. As noted in the energy sector description above, the utilities sector also includes renewable electricity producers. Utilities sector stocks are usually steady, conservative performers with regional geographic reach.
Real Estate
Finally, the real estate sector is broken down into two primary sub-industries: real estate management and development companies, and real estate investment trusts (REITs). Real estate management companies include those involved in diversified real estate activities, operations, development and management. REITs are tax-advantaged businesses that lease their properties and pay dividends to shareholders.
How to Invest in Stock Market Sectors
There are two primary ways to invest in stock market sectors.
For broad exposure to individual stock market sectors, you could buy shares of sector-specific mutual funds or exchange-traded funds (ETFs). Mutual funds and ETFs are investment instruments comprised of large baskets of stocks that concentrate on a common theme or market — in this case, any given sector you want exposure to.
Alternatively, you could buy shares of best-of-breed individual stocks within each sector. Rather than broad exposure to a given industry as provided by sector-specific mutual funds or ETFs, this approach gives you more control over where to put your money to work in each sector. But that control comes at the expense of diversification, often results in greater volatility, and requires more time to research the risks and rewards involved with owning individual stocks.
Should you own Stocks in all Market Sectors?
Whether you own stocks in all market sectors is a matter of personal investing style, risk tolerance, and strategy. To that end, you can certainly pick and choose which stocks from each sector you want to buy, performing due diligence to maximize your chances of enjoying outsized returns from each sector. But arguably the easiest way to invest in all sectors is to purchase shares of a low-cost index fund or ETF that mirrors a broad index like the S&P 500, which contains stocks in all 11 sectors (though it does not necessarily contain representative stocks from each of the 69 identifiable sub-industries within those 11 sectors). Over longer periods of time, holding stocks in all market sectors is a good way to smooth out your returns as weakness in some sectors is offset by strength in others.
Is Sector Investing a Good Strategy?
Each stock market sector has its own merits and pitfalls. Some, like consumer staples, health care, and utilities, tend to have steady performance through even adverse market conditions, rising interest rates, tight monetary policy from the U.S. Federal Reserve, and macroeconomic uncertainty. But this steady performance also means potentially sacrificing greater gains in times of strength for individual sectors. Others, such as information technology and consumer discretionary stocks, often dramatically outperform other sectors in times of economic strength, low interest rates, and otherwise easy money policies from the Fed.
Even then, I’d be remiss if I didn’t reiterate that there are no guarantees while investing in stocks, and following a sector investing strategy is no exception.
More than anything, a basic understanding of the stock market’s 11 core sectors serves to bolster your understanding of the market’s ebbs and flows. By maintaining that knowledge, it can serve as a cornerstone to help you make better decisions as you build your portfolio.
