You’ve probably heard of stock market sectors, but do you know what they are? Stock sectors are categories of companies that operate certain types of businesses. There are 11 stock market sectors that make up the stock market, according to the Global Industry Classification Standard.
Sector classifications are like the taxonomies used by biologists to label organisms. Within the kingdom of stocks, a stock’s sector would be its phylum; within sectors, industries contain even more closely related companies.
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The performance of stock market sectors varies depending on the nature of the economy. This is why it can be beneficial to have investment exposure to each sector — so you can be covered no matter what.
While one sector may perform poorly as a result of bad economic conditions, others may thrive. That’s why it’s important to know each stock market sector and the factors that influence their performance, allowing you to position your investment portfolio to take advantage of changing market cycles.
Here’s a rundown of all 11 sectors, alongside prominent companies in each area, five-year sector performance as of Oct. 10 and a popular sector exchange-traded fund, or ETF, for each:
— Materials.
— Industrials.
— Financials.
— Energy.
— Consumer discretionary.
— Information technology.
— Communication services.
— Health care.
— Consumer staples.
— Utilities.
— Real estate.
Materials
A company with a core business that involves taking raw materials or natural resources and converting them into something more useful is almost always labeled a materials stock. Many chemical companies, mining companies, metals businesses and logging companies are in the materials sector, as are some oil and natural gas stocks. The performance of the materials sector is often influenced by inflation and changes in the U.S. dollar.
The materials sector tends to do well when the economy is growing and when there is high demand for industrial metals. Materials companies often do well in the early stage of the business cycle, as the economy is expanding and inflation is picking up.
Major examples: Rio Tinto Group (ticker: RIO), Vale SA (VALE) and Ecolab Inc. (ECL)
Five-year sector performance: +42.4%
Largest materials sector ETF: Materials Select Sector SPDR Fund (XLB)
Industrials
Industrial sector stocks tend to either be involved directly in the production of capital goods like aircraft, electrical equipment, industrial machinery and the like, or the provision of transportation services and infrastructure. Many of America’s most iconic blue-chip companies hail from the industrial sector, with many also playing a historical role in the evolution of U.S. society and American military might. The industrials sector has a market capitalization of about $6 trillion as of October 2023.
Major examples: Boeing Co. (BA), Lockheed Martin Corp. (LMT), General Electric Co. (GE), Caterpillar Inc. (CAT)
Five-year sector performance: +33%
Largest industrial sector ETF: Industrial Select Sector SPDR ETF (XLI)
[SEE: Best Stocks to Buy in All 11 Market Sectors]
Financials
There has probably never been so stark and empirical a rebuttal to the glib aphorism “All press is good press” than financial sector stocks amid the Great Recession. Banks were failing left and right, with many small- or mid-cap names going bankrupt or being bought out for pennies on the dollar. Even some of the biggest names on Wall Street — like Bear Stearns and Lehman Brothers — failed or were bailed out. Fifteen years later, the largest banks are much more gargantuan than they were in the financial crisis. The financials sector is historically one of the larger beneficiaries of rising interest rates, but with many investors turning to cash in times of economic uncertainty, lower loan demand could weigh on the sector’s earnings potential.
Major examples: Bank of America Corp. (BAC), Visa Inc. (V), PayPal Holdings Inc. (PYPL), Berkshire Hathaway Inc. (BRK.A, BRK.B)
Five-year sector performance: +18.8%
Largest financial sector ETF: Financial Select Sector SPDR ETF (XLF)
Energy
Businesses that provide the services and equipment allowing companies to extract energy sources from the earth are considered a part of this sector, as are most of the companies that do the exploration, production, refining and marketing of fossil fuels like oil, natural gas and coal. Oilfield services companies are considered energy stocks, even if they just help locate a reservoir for a larger company or if they sell the equipment, fluids and materials necessary for horizontal fracturing, known as fracking. The energy sector was a major outperformer in 2022 as oil prices soared, but over the long run, energy has been one of the least impressive sector performers. Given the uncertainty around oil prices, there may be volatility in this sector in the short term.
Major examples: Exxon Mobil Corp. (XOM), Schlumberger Ltd. (SLB), Kinder Morgan Inc. (KMI), Halliburton Co. (HAL)
Five-year sector performance: +17.9%
Largest energy sector ETF: Energy Select Sector SPDR ETF (XLE)
Consumer Discretionary
Sometimes a name can say it all. Consumer discretionary is one of the more aptly named stock sectors: Companies within it market their products and services to consumers, not businesses, and what they sell is generally bought with discretionary income. Some industries the sector encompasses are automobiles, apparel, hotels, restaurants, leisure-related businesses and luxury goods, to name a few. As we enter a post-pandemic world, there are several tailwinds for the consumer discretionary sector, such as the growth of e-commerce, renewed spending on travel and the rapid rise of the electric vehicle.
Major examples: Carnival Corp. (CCL), Lululemon Athletica Inc. (LULU), Tesla Inc. (TSLA)
Five-year sector performance: +42.6%
Largest consumer discretionary sector ETF: Consumer Discretionary Select Sector SPDR ETF (XLY)
Information Technology
Arguably the premier stock market sector of the 21st century, information technology contains pretty much all the essential industries of today’s internet-powered, device-driven world. Broadly speaking, software, hardware and semiconductors are the three pillars of this sector. As the internet plays an increasingly important role in our everyday lives, the sector has the potential for future growth in artificial intelligence, smart devices, cloud-based products and the metaverse. The information technology sector has a market cap of more than $13.6 trillion as of October 2023, making it the most valuable of the 11 sectors.
Major examples: Apple Inc. (AAPL), Cisco Systems Inc. (CSCO), Intel Corp. (INTC), Oracle Corp. (ORCL)
Five-year sector performance: +134.7%
Largest information technology sector ETF: Vanguard Information Technology ETF (VGT)
[See: The 10 Biggest Tech Companies in the World]
Communication Services
One of the newer stock market sectors is communication services, which was formerly known as the telecom sector and was redefined in fall 2018. Decades of mergers and consolidation in the arena had made telecom an ultra-concentrated and practically irrelevant sector in terms of market cap, and something else was happening: Efficient data transmission became increasingly important, and a torrential stream of popular new content that attracted billions of eyeballs demanded smooth and reliable distribution. Today, the communication services sector loosely refers to companies that offer such services (like traditional telecoms) and media and entertainment companies that facilitate communication but also have their own content.
Major examples: Verizon Communications Inc. (VZ), Meta Platforms Inc. (META), Walt Disney Co. (DIS), Comcast Corp. (CMCSA)
Five-year sector performance: +48.1%
Largest communication services sector ETF: Communication Services Select Sector SPDR ETF (XLC)
Health Care
Both on Wall Street and Main Street, health care is another sector that’s been growing faster than the wider economy, accounting for an ever-larger percentage of Americans’ expenses (and portfolios). You’ve got two broad sides of health care when it comes to its classification in the stock market: the medical device manufacturers, medical services providers and telehealth on one hand, and the actual biotech and pharmaceutical products — the drugs themselves — on the other. The outlook for the health care sector is positive. As the population ages, many companies in this sector are innovating and improving their products and services to come up with better treatments, which can translate to higher profits in the long term.
Major examples: Johnson & Johnson (JNJ), Pfizer Inc. (PFE), McKesson Corp. (MCK), Abbott Laboratories (ABT)
Five-year sector performance: +39.8%
Largest health care sector ETF: Health Care Select Sector SPDR ETF (XLV)
Consumer Staples
Without the fruits of this sector, the human species as we know it would essentially go extinct. You always need food, toilet paper, laundry detergent, shampoo, toothpaste and the like. The consumer staples sector can hold its own or even advance during a recession, but it usually trails the market in expansions. Lately, inflation has been a real problem for investors. In times of economic uncertainty, it’s popular to hold on to companies that are under the consumer staples category, which is why it is labeled as a defensive sector.
Major examples: Coca-Cola Co. (KO), Colgate-Palmolive Co. (CL), Procter & Gamble Co. (PG), Walmart Inc. (WMT)
Five-year sector performance: +28.1%
Largest consumer staples sector: Consumer Staples Select Sector SPDR ETF (XLP)
Utilities
Utilities provide fundamentally necessary services like water, gas and electricity to local communities and often wider regions. There are very high barriers to entry because of the capital-intensive and geographically limiting nature of these businesses, often making these companies natural monopolies. For this reason, they’re highly regulated and their profitability is held in check by the government. The utilities sector is known for providing consistent returns, and like consumer staples, it is a defensive sector. But when the economy is expanding, the sector can underperform. Investors can also typically rely on utilities for their dividend income.
Major examples: NextEra Energy Inc. (NEE), Duke Energy Corp. (DUK), Exelon Corp. (EXC), Dominion Energy Inc. (D)
Five-year sector performance: +8%
Largest utilities sector ETF: Utilities Select Sector SPDR ETF (XLU)
Real Estate
One of the fastest-growing parts of the market in recent decades has been real estate, embodied most clearly by the rise of the real estate investment trust. A REIT is a tax-advantaged investment vehicle that can give retail investors a convenient way to gain easy exposure to the cash flows that come with real estate ownership, but without the massive capital outlay required. All REITs except mortgage REITs are contained in this sector; mortgage REITs are found in the financial sector. Also, real estate development companies and management companies fall under this umbrella.
Major examples: Redfin Corp. (RDFN), American Tower Corp. (AMT), Simon Property Group Inc. (SPG), Public Storage (PSA)
Five-year sector performance: +7.1%
Largest real estate sector ETF: Vanguard Real Estate ETF (VNQ)
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Stock Market Sectors 101: A Guide to All 11 Sectors originally appeared on usnews.com
Update 10/11/23: This story was previously published at an earlier date and has been updated with new information.
