The stock market is divided into 11 market sectors based on the Global Industry Classification Standard, or GICS. This system, created jointly by Morgan Stanley and Standard & Poor’s, sorts companies into sectors based on their primary business activities.
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Investors can then use the sector classifications to ensure that their portfolios are fully diversified and not overly exposed to one particular area of the economy. Investors can also use sector classifications to adjust their exposure to particular themes, such as technology or energy. To understand how best to balance your portfolio, you must first understand what types of stocks are in each sector.
Here’s a look at each sector and examples of notable companies:
— Information technology.
— Financials.
— Health care.
— Consumer discretionary.
— Communication services.
— Industrials.
— Consumer staples.
— Energy.
— Utilities.
— Materials.
— Real estate.
Information Technology
As of July 19, the largest sector is information technology, which makes up nearly a third (31.9%) of the S&P 500 by market cap. While many modern companies develop and use technology as a key part of their businesses, IT companies’ primary business is selling technology products and services. In the past 10 years, the Technology Select Sector SPDR Fund (ticker: XLK) has more than doubled the return of the S&P 500. However, technology sector stocks can be volatile, and many trade at high valuations.
Major examples: Apple Inc. (AAPL), Microsoft Corp. (MSFT), Nvidia Corp. (NVDA) Five-year sector performance: +202% Largest information technology sector ETF: Vanguard Information Technology ETF (VGT)
Financials
The financial sector makes up about 12.8% of the S&P 500. It includes companies involved in investing, finance, and the movement and storage of money. Financial sector industries include insurance, credit services, asset management and banks. Financial sector stocks are generally considered stable, but the sector plummeted during the 2008 financial crisis thanks to fears over bank contagion. The sector typically benefits from a strong U.S. economy because it relies heavily on mortgage and other lending. Many financial sector stocks benefit from high interest rates, but high rates can also weigh on loan growth.
Major examples: Berkshire Hathaway Inc. (BRK.A, BRK.B), JPMorgan Chase & Co. (JPM), Visa Inc. (V) Five-year sector performance: +53% Largest financial sector ETF: Financial Select Sector SPDR ETF (XLF)
Health Care
The health care sector makes up about 11.8% of the S&P 500 market cap. Health care companies include medical supply companies, scientific research companies, pharmaceutical companies, and others focused on products and services to improve wellness of the human body or mind. The health care sector even includes recreational and medicinal cannabis companies. It consists of industries such as biotechnology, drug manufacturing and health care plans. An aging U.S. population may produce significant investing opportunities in health care in coming decades as the baby boomer generation creates tremendous demand for health care services.
Major examples: Eli Lilly & Co. (LLY), UnitedHealth Group Inc. (UNH), Johnson & Johnson (JNJ) Five-year sector performance: +61% Largest health care sector ETF: Health Care Select Sector SPDR ETF (XLV)
Consumer Discretionary
The consumer discretionary sector accounts for about 10% of the S&P 500’s weighting. Discretionary products are things that people buy that are luxury items or services and are not necessary for survival or day-to-day life. Jewelry, cars, sporting goods and electronic devices are examples of discretionary products. If it’s something you want but can live without, it’s probably a discretionary product. Discretionary spending relies heavily on disposable income, meaning the sector depends on a healthy U.S. economy. Consumer discretionary industries include restaurants, gambling and apparel retail. Global e-commerce growth and a rebound in corporate travel could be tailwinds for the sector.
Major examples: Amazon.com Inc. (AMZN), Tesla Inc. (TSLA), Home Depot Inc. (HD) Five-year sector performance: +55% Largest consumer discretionary sector ETF: Consumer Discretionary Select Sector SPDR ETF (XLY)
Communication Services
The communication services sector has a 9% weighting in the S&P 500. Communication services companies offer products and services that help people stay connected via the internet or phone. Entertainment and media companies are also included in the sector, along with industries such as advertising agencies, electronic gaming, and internet content and information. The communication services sector was historically known as the telecommunications sector, but it was reconstructed in 2018 to include a wider variety of companies. Some popular Silicon Valley internet companies that investors may think of as technology companies are now technically classified as communication services stocks.
Major examples: Alphabet Inc. (GOOG, GOOGL), Meta Platforms Inc. (META), Netflix Inc. (NFLX) Five-year sector performance: +80% Largest communication services sector ETF: Communication Services Select Sector SPDR ETF (XLC)
Industrials
The industrial sector makes up 8.3% of the S&P 500 by market cap. It includes companies that manufacture and distribute capital goods, in addition to companies in the transportation business and those that provide commercial services and supplies. Many of the blue-chip manufacturing and military companies that have played a critical role in shaping American history are classified as industrials. Because many different businesses are included in the sector, it has 14 unique industries. Aerospace and defense, airlines and railroads are three examples. The industrial sector tends to perform well during the early stages of the business cycle.
Major examples: Caterpillar Inc. (CAT), GE Aerospace (GE), Union Pacific Corp. (UNP) Five-year sector performance: +63% Largest industrial sector ETF: Industrial Select Sector SPDR ETF (XLI)
[READ: 10 of the Best Stocks to Buy for 2024]
Consumer Staples
The consumer staples sector makes up about 5.8% of the S&P 500. It includes companies whose products are necessary for day-to-day life. Consumer staples companies include food and beverage makers, personal product providers and household product manufacturers. Unlike consumer discretionary companies, consumer staples companies are generally very stable even during economic downturns because of the critical nature of their businesses. Grocery stores, tobacco companies, and education and training service providers are examples of consumer staples industries. These industries remain relatively steady even during recessions, making the sector an excellent defensive investment.
Major examples: Walmart Inc. (WMT), Procter & Gamble Co. (PG), Costco Wholesale Corp. (COST) Five-year sector performance: +35% Largest consumer staples sector ETF: Consumer Staples Select Sector SPDR ETF (XLP)
Energy
The energy sector makes up about 3.7% of the S&P 500 market cap. Energy companies include all companies that operate in the oil, gas and consumable fuels businesses. These companies range from oil and gas drillers and companies that transport and refine fuel to companies that sell and distribute fuel to consumers. The energy sector consists of industries such as oil and gas exploration and production, oil and gas equipment and services, and integrated oil and gas majors. The performance of many energy sector stocks is highly correlated to crude oil and natural gas spot prices.
Major examples: Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), ConocoPhillips (COP) Five-year sector performance: +53% Largest energy sector ETF: Energy Select Sector SPDR ETF (XLE)
Utilities
The utility sector accounts for about 2.3% of the S&P 500’s weighting. Utility services are those that required in a comfortable, modern home or business, such as electricity, water and gas. In addition, many utility companies are developing and integrating renewable energy sources. Utility industries include regulated electric companies, renewable utilities and independent power producers. The utility sector is extremely defensive, meaning it typically holds up well during economic downturns but may underperform during periods of economic expansion. The sector is also known for its high dividend yields, making it an attractive option for retirees and income investors.
Major examples: NextEra Energy Inc. (NEE), Southern Co. (SO), Duke Energy Corp. (DUK) Five-year sector performance: +15% Largest utilities sector ETF: Utilities Select Sector SPDR ETF (XLU)
Materials
The materials sector has a 2.2% weighting in the S&P 500. As the name implies, materials firms provide the raw materials companies in other sectors use to produce goods. They mine and distribute commodities such as gold, copper and zinc, and harvest and process wood used in construction. Specialty chemical companies that produce plastics, polymers and other synthetic materials are included in the materials sector, along with industries such as steel production, agricultural inputs and building materials. The sector also includes companies that specialize in packaging materials. Materials sector stocks tend to perform well during the early stages of the business cycle.
Major examples: Linde PLC (LIN), Sherwin-Williams Co. (SHW), Freeport-McMoRan Inc. (FCX) Five-year sector performance: +55% Largest materials sector ETF: Materials Select Sector SPDR Fund (XLB)
Real Estate
The real estate sector makes up 2.2% of the S&P 500 by market cap. It includes companies that own and manage real estate assets. Many companies in the real estate sector are structured as real estate investment trusts, or REITs. REITs are companies that own, operate or finance real estate properties by pooling capital investors and distributing income generated from their investments. Many REITs have high dividend yields as well. Real estate sector industries include industrial REITs, specialty REITs and health care facilities REITs. The sector also includes real estate development and management companies.
Major examples: Prologis Inc. (PLD), American Tower Corp. (AMT), Equinix Inc. (EQIX) Five-year sector performance: 10% 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 07/22/24: This story was previously published at an earlier date and has been updated with new information.
