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Constructing a diverse portfolio can feel like a daunting task. How do you make sure that your portfolio diversification includes stocks that are sufficiently different from each other? One way to add diversity to your stock portfolio is by understanding sectors.
There are 11 stock market sectors and the best financial advisors might encourage you to make sure that you don’t have too many stocks from one sector making up your portfolio. Let’s take a look at the different stock market sectors and what you need to know as you manage your brokerage account.
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Find the right financial advisor with WiserAdvisor
What is the GICS system and why is it important?
The Global Industry Classification Standard (GICS) is designed to provide a consistent way to sort stocks according to shared characteristics. The GICS was developed by MSCI and S&P Dow Jones Indices. These are major exchange groups on the world stage. The GICS system helps brokers, financial advisors, researchers and others classify stocks into sectors. The GICS is updated periodically to reflect changes in the market.
Stocks in the same sector are usually companies in the same industry or in a related field. The stocks in each sector have commonalities. It allows investors to look at stocks in the same area of the economy and figure out which ones are doing well, given the economic situation.
For example, a stock in the energy sector is typically not going to be affected by the same market pressures as a stock in the health care or real estate sector. As a result, investors will want to prioritize investing in different sectors during different stages of a business cycle. In other words, some sectors or industries do better during economic recessions, and others do better during economic expansions.
The 11 sectors of the stock market
The GCIS system classifies stocks into 11 different sectors:
- Health care.
- Materials.
- Energy.
- Consumer discretionary.
- Consumer staples.
- Industrials.
- Utilities.
- Financials.
- Information technology.
- Communication services.
- Real estate.
The stocks in each sector are generally part of the same industry and therefore affected by the same market forces.
Health care sector
The health care sector includes stocks that can be divided into two main types:
- Pharmaceutical and biotechnology treatment development, including tools, supplies and other items needed in the development and trials of these treatments.
- Health care services and equipment, which includes companies that develop supplies for providers (like surgical tools and diagnostic equipment), as well as health insurance companies.
Materials sector
In the materials sector, you’ll find companies that offer needed materials for various parts of the manufacturing process. That includes chemical makers, paper makers, agricultural commodity companies, and steel companies. Companies in this sector provide the raw and refined materials needed to keep the supply chain going.
Energy sector
This sector is mostly made up of oil and gas companies, as well as companies that keep the oil and gas industry running, including pipeline builders and refineries. Companies that supply these energy producers with equipment may also be considered part of this sector.
It’s important to note that many renewable energy companies aren’t included in this sector. Instead, they’re more likely to be classified as utilities.
Consumer discretionary sector
These companies produce products that consumers are likely to use in times when they are feeling more financially stable. For example, companies that produce and sell luxury goods and other higher-priced items that aren’t considered staples of living are often included in this sector. These companies can also include retailers, like Amazon (AMZN) that sell a variety of non-necessary goods, as well as restaurant companies.
Consumer staples sector
Companies in the consumer staples sector focus on producing and selling items that people need, regardless of their financial position. For example, even during an economic downturn, most people will still have to buy staples like toilet paper and personal hygiene items. Food and beverage companies, and even tobacco companies, are included in this sector.
Industrials sector
Companies in this sector typically use, make, or distribute heavy equipment. This category includes defense contractors, airplane makers, construction companies, and companies that manufacture heavy machinery, electrical equipment and building products.
Utilities sector
Companies in the utilities sector provide utilities like power and water to consumers and businesses. Many renewable energy companies are in the utilities sector, including some companies that provide solar or wind energy.
Financials sector
Financial services providers make up the bulk of this sector. This includes banks, insurance companies, brokerages, credit card providers, and online payment companies. Mortgage REITs are also included in the financials sector.
Information technology sector
Companies in this sector include those that revolve around technology. Companies that manufacture or distribute software or hardware, software development companies, and companies that provide related services are included in this sector.
Communication services sector
This is the most recent sector to be added to the GICS system. This sector includes telecom companies that provide landline and cell phone service, entertainment and media companies, and .companies that provide social media services.
Real estate sector
The real estate sector includes companies that make their money from real estate holdings. This includes property conglomerates and companies that offer real estate management and development services. This sector also includes all real estate investment trusts (REITs) except for mortgage REITs.
How to invest in stock market sectors
There are different ways to invest in stock market sectors, depending on your situation. Some ways to get involved include:
- Use your brokerage account to buy individual stocks. Research individual stocks from different sectors. Buy shares of stocks from different sectors to increase portfolio diversification.
- Buy sector funds. You can buy mutual funds and ETFs based on these sectors. When making your purchase, check the expense ratio to make sure you aren’t spending a lot of money on fees.
- Use a robo advisor. For a more hands-off approach, a robo advisor like M1 Finance can create a portfolio for you using different types of funds. Check on the funds used to make sure you have a diversified portfolio.
- Get help from a financial advisor. A good financial advisor, such as someone you connect with through SmartAdvisor by SmartAsset, can provide you with information about investing in stock market sectors and help you find funds that can fit with your overall financial strategy.
How to include sectors into your investment portfolio
If you decide to adopt a sector investing strategy, it can make sense to think about how sectors generally perform during different parts of the economic cycle.
For example, during the low point of an economic cycle, consumer staples and utilities generally hold their value and do reasonably well. This is because people still need to buy necessities like food and pay their electric bill during a recession.
On the other hand, as the economy does well and climbs toward the peak of its cycle, the consumer discretionary and communication services sectors tend to do better.
The financials sector tends to start picking up toward the end of a down cycle as things start looking a little better.
There’s no guarantee that any sector will behave a certain way, and there are times when companies in a sector might perform differently than expected. However, knowing when companies in a certain sector are likely to be undervalued can provide you with potential buying opportunities.
If you want to learn more, a financial advisor can help you understand this process.
Sectors are slices of the market (and the economy)
Understanding what sector a company is in, and how that sector is affected in times of economic growth or recession, can help you determine which stocks you should add to your portfolio and which stocks you should sell.
Frequently asked questions (FAQs)
What are the 24 industry groups of the stock market?
The 11 sectors are broken down further into industry groups. The 24 industry groups in the GICS system are:
- Automobiles & Components
- Banks
- Capital Goods
- Commercial & Professional Services
- Consumer Durables & Apparel
- Consumer Services
- Diversified Financials
- Energy
- Food, Beverage & Tobacco
- Food and Staples Retailing
- Health Care Equipment and Services
- Household and Personal Products
- Insurance
- Materials
- Media & Entertainment
- Pharmaceuticals & Biotechnology & Life Sciences
- Real Estate
- Retailing
- Semiconductors & Semiconductor Equipment
- Software and Services
- Technology Hardware & Equipment
- Telecommunication Services
- Transportation
- Utilities
What are the big 6 stocks?
These are the biggest stocks by capitalization on the stock market. They can change over time, based on market cap, but they are the stocks at the top of the list. In recent years, the big six stocks have included powerhouses like Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOG).
Where are the best sectors to invest in 2023?
In general, the best sectors to invest in depend on where you think the economy is headed in a given business cycle. For example, in the early business cycle, stocks in the financials, materials, industrials, real estate, consumer discretionary, and information technology sectors tend to do well. Past performance is not a predictor of future performance, however. When investing, it’s always good to get professional advice from a registered investment advisor. WiserAdvisor provides an online database of financial advisors from both Fortune 500 companies and small independent firms. All advisors are subject to a qualification process to be eligible for inclusion in the network.
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