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 it’s important to ensure that you don’t have too many stocks from one sector in your portfolio. Let’s take a closer look at these different stock market sectors and what you need to know to manage your brokerage account effectively.
What is the GICS system and why is it important?
The Global Industry Classification Standard (GICS) is a system designed to sort stocks according to shared characteristics. Developed by MSCI and S&P Dow Jones Indices, two major exchange groups, the GICS system helps classify stocks into sectors. It is periodically updated to reflect changes in the market.
Stocks in the same sector are typically companies in the same industry or a related field. This classification allows investors to analyze stocks in the same area of the economy and determine their performance based on the economic situation.
For example, a stock in the energy sector is not likely to be affected by the same market pressures as a stock in the health care or real estate sector. Investors can prioritize investing in different sectors during different stages of the business cycle. Some sectors or industries perform better during economic recessions, while others thrive during economic expansions.
The 11 sectors of the stock market
The GICS 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 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, as well as health insurance companies.
Materials sector
The materials sector consists of companies that offer needed materials for various parts of the manufacturing process. This includes chemical makers, paper makers, agricultural commodity companies, and steel companies. These companies provide the raw and refined materials necessary to keep the supply chain going.
Energy sector
The energy sector is primarily made up of oil and gas companies, along with companies that support the industry, such as pipeline builders and refineries. It’s important to note that many renewable energy companies are not included in this sector and are more likely classified as utilities.
Consumer discretionary sector
Companies in the consumer discretionary sector produce goods that consumers are likely to buy when they feel financially stable. This includes companies that produce and sell luxury goods and other higher-priced items, as well as retailers and restaurant companies.
Consumer staples sector
Companies in the consumer staples sector focus on producing and selling essential items that people need regardless of their financial position. This includes food and beverage companies, personal hygiene items, and even tobacco companies.
Industrials sector
Companies in the industrials sector typically use, make, or distribute heavy equipment. This includes defense contractors, airplane makers, construction companies, and manufacturers of heavy machinery, electrical equipment, and building products.
Utilities sector
Companies in the utilities sector provide essential services like power and water to consumers and businesses. It includes renewable energy companies and those that provide solar or wind energy.
Financials sector
The financials sector is dominated by financial services providers such as banks, insurance companies, brokerages, credit card providers, and online payment companies. Mortgage REITs are also included in this sector.
Information technology sector
The information technology sector includes companies that revolve around technology. This includes software and hardware manufacturers, software development companies, and companies that provide related services.
Communication services sector
The communication services sector is the most recent addition to the GICS system. It includes telecom companies, entertainment and media companies, and those providing social media services.
Real estate sector
The real estate sector includes companies that make their money from real estate holdings. This includes property conglomerates, real estate management, and development services. Real estate investment trusts (REITs) are also part of this sector, except for mortgage REITs.
How to invest in stock market sectors
There are several ways to invest in stock market sectors, depending on your situation:
- Use your brokerage account to buy individual stocks from different sectors to increase portfolio diversification.
- Buy sector funds like mutual funds and ETFs based on these sectors. Check the expense ratio to ensure reasonable fees.
- Consider using a robo advisor like M1 Finance for a more hands-off approach. They can create a diversified portfolio for you using different types of funds.
- Seek guidance from a financial advisor who can provide information about investing in stock market sectors and help you find funds that fit your overall financial strategy.
How to include sectors into your investment portfolio
If you decide to adopt a sector investing strategy, it’s important to consider how sectors generally perform during different parts of the economic cycle.
For example, during the low point of an economic cycle, sectors like consumer staples and utilities tend to hold their value and perform well. On the other hand, as the economy grows and reaches its peak, sectors like consumer discretionary and communication services tend to thrive. The financials sector also tends to pick up as the economy improves.
While there’s no guarantee that any sector will behave a certain way, understanding when companies in a certain sector are likely to be undervalued can provide potential buying opportunities.
If you want to learn more about this process, a financial advisor can provide valuable insights.
Sectors are slices of the market (and the economy)
Understanding the sector a company belongs to and how that sector is affected during economic growth or recession can help you determine which stocks to add or remove from your portfolio.
Remember, it’s always a good idea to seek professional advice from a registered investment advisor when investing. If you’re looking for financial advisors, you can find one through WiserAdvisor, an online database that includes advisors from Fortune 500 companies and small independent firms.
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