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The number of stocks listed worldwide is staggering.
Across the New York Stock Exchange (NYSE) and Nasdaq alone, nearly 6,000 companies are listed at the time of writing.
Thankfully, there’s an easy way to sort and categorise these stocks: the Global Industry Classification Standard (GICS). Split into 11 standardised sectors, the GICS system offers investors a clear picture of the sectors they’re exposed to and their level of diversification.
Stock market sectors are a way of sorting businesses into distinct categories based on their role in the economy and similar industries, like technology, healthcare, or finance. These sectors streamline the way we navigate the vast number of publicly traded companies but are also critical in assets like Exchange-Traded Funds (ETFs) and mutual funds. For instance, many ETFs offer diversified exposure to specific sectors, like Vanguard's Information Technology ETF (VGT) or SDPR's Financial Select Sector ETF (XLF). Mutual funds, on the other hand, can use stock sectors to manage their risk and optimise returns strategically.
The Global Industry Classification Standard, developed by MSCI and S&P Dow Jones Indices, offers a detailed framework for 11 sectors. They’re broken down further into 25 industry groups, 74 industries, and 163 sub-industries.
Several benefits can be derived from the GICS, including simplifying sector rotation strategies in economic cycles. When economic growth starts to sour, companies involved in essential goods and services—like consumer staples, healthcare, and utilities—often hold or retain value. Conversely, ‘riskier’ sectors, like raw materials, consumer discretionary, and information technology, tend to outpace the market when an economy booms.
The energy sector comprises companies producing and supplying energy, particularly oil, natural gas, and coal. Businesses range from extractors and refiners to those providing the necessary equipment and services for energy production. Notably, renewable energy companies are excluded and are instead included in the utilities sector.
Examples of energy companies: ExxonMobil, Chevron, and Shell
The materials sector is made up of those who earn revenue from the extraction/processing of raw materials and supplying them to other industries. Types of firms include metal mining companies, chemical producers, and building material manufacturers. Given its reliance on demand from other industries, the materials sector is susceptible to economic changes.
Examples of materials companies: DuPont, Dow, and Newmont Mining
The industrials sector includes businesses involved in manufacturing, construction materials, infrastructure development, and aerospace. It’s one of the broadest GICS categories, covering everything from capital goods producers to defence and transportation companies. Its performance is a crucial indicator of economic health, as industrial output often declines during recessions and vice versa.
Examples of companies in this sector: UPS, Boeing, and Caterpillar
The consumer discretionary sector features companies that produce or sell non-essential goods and services, like cars, luxury goods, and entertainment. This includes experience-based firms, like restaurant and hotel chains. Economic downturns can hit this sector hard as consumers cut back on discretionary spending.
Examples of consumer discretionary companies: Amazon, Tesla, and Starbucks
In contrast to consumer discretionary, the consumer staples sector refers to those that sell or produce essential goods, like food, beverages, and household/personal products. These are goods that consumers need, regardless of economic fundamentals, making the sector reasonably resistant to recessions.
Examples of consumer staples companies: Coca-Cola, Procter & Gamble, and Walmart
The healthcare sector is divided into industry groups: healthcare equipment and services, pharmaceuticals, biotechnology, and life sciences. The former comprises medical services providers, equipment manufacturers and supplies, and facility managers. The latter is more experimental, using medical technology and research to produce new drugs and similar healthcare solutions. Given its essential nature, the healthcare sector is relatively stable; however, biotechnology firms and others on the cutting edge of healthcare innovation tend to be more volatile.
Examples of healthcare companies: Pfizer, Johnson & Johnson, and UnitedHealth Group
The financials sector comprises three sub-categories: banking, insurance, and diversified financial services. The first two often include a nation’s oldest and most respected establishments, seen as critical for the functioning of an economy. The latter comprises more niche enterprises, like those involved in personal finance management, brokerages, and consumer finance. Importantly, this sector is highly exposed to interest rate cycles.
Examples of companies in the financial sector: JPMorgan Chase, Goldman Sachs, and Visa
The information technology sector covers companies that develop, manage, and distribute technology solutions, like software developers and hardware manufacturers (such as those producing semiconductors). It’s been one of the fastest-growing sectors over the past two decades, given the integration of technology in industrial and everyday applications and features some of the world’s best-known companies.
Examples of information technology companies: Intel, Apple, and Microsoft
The telecommunication services sector consists of companies that provide communication services through voice, data, text, and video. This includes internet and cable providers and features more groundbreaking media and entertainment companies, like streaming services and social media platforms.
Examples of telecommunication services companies: Verizon, Meta, and Netflix
The utilities sector includes firms that provide or generate essential services such as electricity, natural gas, and water. Utility firms are typically regional and function as regulated monopolies, though the sector also features independent power producers, energy traders, and renewable energy firms. It’s considered relatively stable, as, like healthcare, utility companies are crucial for everyday life.
Examples of utility companies: Duke Energy, Southern Company, and American Electric Power
The real estate sector, the newest GICS sector, encompasses companies that own, develop, and manage various property types, like residential, commercial, and industrial spaces. Real estate investment trusts (REITs) are a huge sector component, allowing individual investors to allocate some of their portfolios to real estate ventures.
Examples of real estate companies: Simon Property Group, Boston Properties, and American Tower
While past performance isn’t an indicator of future performance, knowing which sectors outperform and underperform during the economic cycle is helpful. Changing your allocation as the economy grows or contracts—known as sector investing—can be a prudent move. Such an approach can make all the difference in creating a more resilient and dynamic investment strategy.
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