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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.
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.
The big names in this sector include:
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:
- DowDuPont (DD)
- Ecolab (ECL)
- Rio Tinto (RIO)
- Scotts Miracle-Gro (SMG)
- Sherwin-Williams (SHW)
- Valvoline (VVV)
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.
Major players in this sector include:
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.
Big names in the healthcare sector include:
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.
Popular companies in this sector include:
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:
- Aimco (AIV)
- AvalonBay Communities (AVB)
- Public Storage (PSA)
- Redfin Corp. (RDFN)
- Simon Property Group (SPG)
How to invest in stock sectors
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 Select Sector SPDR
- Alerian MLP ETF
- Vanguard Energy ETF
- JPMorgan Alerian MLP Index ETN
- Market Vectors TR Gold Miners
- Materials Select Sector SPDR
- iShares U.S. Home Construction ETF
- VanEck Vectors Gold Miners ETF
- Industrial Select Sector SPDR
- Vanguard Industrials ETF
- iShares Transportation Average ETF
- iShares U.S. Aerospace & Defense ETF
- Consumer discretionary
- Consumer Discretionary Select Sector SPDR
- Consumer Discretionary AlphaDEX Fund
- Vanguard Consumer Discretion ETF
- Fidelity MSCI Consumer Discretionary Index ETF
- Consumer staples
- Consumer Staples Select Sector SPDR
- Consumer Staples AlphaDEX Fund
- Vanguard Consumer Staples ETF
- VanEck Vectors Agribusiness ETF
- Health care
- Health Care Select Sector SPDR
- Nasdaq Biotechnology ETF
- Vanguard Health Care ETF
- iShares Nasdaq Biotechnology ETF
- Financial Select Sector SPDR Fund
- Vanguard Financials ETF
- SPDR S&P Bank ETF
- SPDR S&P Regional Banking ETF
- Information technology
- Technology Select Sector SPDR
- Vanguard Information Tech ETF
- DJ Internet Index Fund
- iShares U.S. Technology ETF
- Telecommunication services
- Vanguard Telecom ETF
- iShares US Telecommunications ETF
- iShares Global Telecom ETF
- Communication Services Select Sector SPDR Fund
- Utilities Select Sector SPDR
- Vanguard Utilities ETF
- iShares Global Infrastructure ETF
- First Trust Utilities AlphaDEX
- Real estate
- Vanguard REIT ETF
- Vanguard Global ex-U.S. Real Estate Index Fund ETF
- Schwab US REIT ETF
- SPDR Dow Jones REIT ETF
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.
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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.
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