Dividing stocks into sectors helps investors compare stocks with their industry peers, which is one of the best ways to judge which ones are doing best. Sectors also provide a guide to spreading your investments into different industries, a key to portfolio diversification.
What are stock sectors?
According to the Global Industry Classification Standard (GICS), there are 11 economic stock sectors, that are further subdivided into 24 industry groups, 68 industries and 157 subindustries.
The GICS was developed by Morgan Stanley Capital International (MSCI) and Standard & Poors (S&P) in 1999 to help global companies and investors compare and sort stocks. The system is used by MSCI indexes and has been modified many times since its inception to account for major shifts in the global economy.
Energy
Companies that make a profit from oil, natural gas and coal fit into the energy sector. This includes companies that help locate, mine, produce, refine or market fuel. The profitability of this stock sector relies on the price of crude oil but stock prices tend to be stable and often pay large dividends.
Companies that process raw materials fit into the materials sector. These companies typically sell to other businesses at the head of the supply chain. They provide manufacturing staples like oil, natural gas, metal, paper and chemicals.
Popular companies in the materials sector include:
The industrial sector consists largely of companies that produce aircraft, construction and agriculture equipment, and industrial machinery. These companies tend to generate positive cash flow and pay regular dividends.
A number of big-name, blue-chip stocks come from the industrials sector, including:
Businesses in the consumer discretionary sector include companies that sell nonessential services and products to consumers. These are services and products consumers purchase with discretionary income — that portion of their income left after paying taxes and essential living expenses. Businesses in this sector include automobile, retail, hotels, restaurants and luxury goods.
A variety of companies crop up in this sector, including:
The consumer staples sector is filled with companies that manufacture and distribute essential goods and services like food, household goods and personal care products. This sector is especially well-positioned to weather recessions because people continue to purchase these goods and services, even during an economic downturn.
The healthcare sector is made up of four major pillars: medical services, healthcare equipment, biotech services and pharmaceuticals. These businesses are typically well-positioned to weather the ups and downs of the market.
The financial sector includes banks, insurance providers and real estate firms. Revenue generated in this sector is directly correlated with interest rates on mortgages and other loans.
This sector is where you’ll encounter the financial big wigs:
Information technology companies manufacture, develop and distribute software and electronics. This sector is deeply rooted in Silicon Valley and operates as one of the leading stock sectors of the 21st century.
Tech giants in the information technology sector include:
Media, entertainment and communications companies form the backbone of the telecom sector. Here, you’ll encounter Internet service providers, streaming services, cable companies and more. With the advent of the Internet, this sector was forced to evolve alongside our consumption habits.
Many will recognize the businesses that belong to the telecom sector:
Businesses in this sector provide water, gas and electricity. These businesses have little competition thanks to the high cost of entry but the prices they charge are strictly controlled by local governments. Like consumer staples, an investment in the utilities sector is considered a safe bet during market downturns because of how essential utilities are.
In the real estate sector, we find developers, management firms and real estate investment trusts (REITs). These companies own and operate commercial real estate that includes apartment buildings, shopping malls, office parks and more. Rent income and property value provide revenue and shareholders receive dividends.
Popular real estate sector companies include:
Imperial Equities Inc. (TSXV: IEI)
Genesis Land Development Corp. (TSX: GDC)
Wall Financial Corporation (TSX: WFC)
Apartment Investment and Management Company (NYSE: AIV)
If you’d like to invest in a particular sector of the stock market, consider exchange-traded funds, or ETFs. ETFs are funds that contain a collection of securities — typically stocks or bonds — that track a particular stock sector or index. ETFs can be bought and sold for a single price like stocks and offer investors the opportunity to gain exposure to a specific industry sector.
Each sector has many ETFs to choose from. While you can purchase individual stocks within each sector, ETFs offer a basket of sector-specific investments that can help protect against market volatility.
Here are some of the most popular ETFs available in each sector:
Energy
Energy Select Sector SPDR (NYSEArca: XLE)
Alerian MLP ETF (NYSEArca: AMLP)
Vanguard Energy Index Fund ETF Shares (NYSEArca: VDE)
JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ)
Materials
VanEck Vectors Gold Miners ETF (NYSEArca: GDX)
Materials Select Sector SPDR Fund (NYSEArca: XLB)
iShares U.S. Home Construction ETF (BATS: ITB)
VanEck Vectors Gold Miners ETF (NYSEArca: GDX)
Industrials
Industrial Select Sector SPDR (NYSEArca: XLI)
Vanguard Industrials Index Fund ETF Shares (NYSEArca: VIS)
First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG)
Vanguard Consumer Staples Index Fund ETF (NYSEArca: VDC)
VanEck Vectors Agribusiness ETF (NYSEArca: MOO)
Health care
Health Care Select Sector SPDR Fund (NYSEArca: XLV)
iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB)
Vanguard Health Care Index Fund ETF (NYSEArca: VHT)
iShares Nasdaq Biotechnology ETF (NasdaqGM: IBB)
Financials
Financial Select Sector SPDR Fund (NYSEArca: XLF)
Vanguard Financials Index Fund ETF (NYSEArca: VFH)
SPDR S&P 500 ETF Trust (NYSEArca: SPY)
SPDR S&P Regional Banking ETF (NYSEArca: KRE)
Information technology
Technology Select Sector SPDR (NYSEArca: XLK)
Vanguard Information Tech ETF (NYSEArca: VGT)
First Trust Dow Jones Internet Index Fund (NYSEArca: FDN)
iShares U.S. Technology ETF (NYSEArca: IYW)
Telecommunication services
Vanguard Communication Services Index Fund ETF Shares (NYSEArca: VOX)
iShares U.S. Telecommunications ETF (BATS: IYZ)
iShares Global Comm Services ETF (NYSEArca: IXP)
Communication Services Select Sector SPDR Fund (NYSEArca: XLC)
Utilities
Utilities Select Sector SPDR Fund (NYSEArca: XLU)
Vanguard Utilities Index Fund ETF (NYSEArca: VPU)
iShares Global Infrastructure ETF (NasdaqGS: IGF)
First Trust Utilities AlphaDEX (NYSEArca: FXU)
Real estate
Vanguard Real Estate Index Fund ETF (NYSEArca: VNQ)
Vanguard Global ex-U.S. Real Estate Index Fund ETF (NasdaqGS: VNQI)
Schwab U.S. REIT ETF (NYSEArca: SCHH)
SPDR Dow Jones REIT ETF (NYSEArca: RWR)
Stock sectors and portfolio diversification
Stock sectors offer investors the opportunity to diversify their portfolio. The stock market can be impacted by a variety of factors, including world events, exchange rates, interest rates and global politics.
Spreading your investments across multiple stock sectors can help reduce portfolio risk when a major event impacts the stock market. Instead of pooling your eggs in a single basket, spread your investments across multiple stock sectors and industries to broaden your opportunities, while reducing losses triggered by market volatility.
There are many ways to invest in the stock market, and understanding the major stock sectors can help you decide where you’d like to invest and how to broaden the reach of your investment portfolio.
To invest, you’ll need to sign up for a brokerage account with a trading platform. Explore your trading options across multiple platforms to ensure you find the best account for your investment goals.
Defensive stock sectors typically maintain their earnings during recessions, making them better positioned to weather economic downturns than other sectors.
Many trading platforms come equipped with research tools and reports that offer stock sector performance indicators. Or you can do your own research using resources from third-party providers like Morningstar and Bloomberg.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades. Read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the product on the provider's website.
Shannon Terrell is a lead writer and spokesperson at NerdWallet and a former editor at Finder, specializing in personal finance. Her writing and analysis on investing and banking has been featured in Bloomberg, Global News, Yahoo Finance, GoBankingRates and Black Enterprise. She holds a bachelor’s degree in communications and English literature from the University of Toronto Mississauga.
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