Stock Sectors: How To Classify And Diversify Your Investment Portfolio – Forbes

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Stock sectors categorize the economy into easy-to-grasp groups. Not only do these help bystanders understand the general trajectories of parts of the economy, but they’re also invaluable in broadly diversifying your investments. By choosing stocks and funds from different industries, you curb your investment risk and set the stage for solid growth.

What Are Stock Sectors?

Stock sectors group together public companies that have a lot in common, like when they share similar business models and are active in related industries. Stock sectors may be further subdivided into smaller categories and may cover several industries.

Global Industry Classification Standard (GICS) is the primary classification system for stock market sectors and divides market industries into 11 sectors, with 24 industry groups, 69 industries and 158 sub-industries. These 11 sectors aren’t static—they can and do change. For example, the real estate sector was added to the list in 2016, signifying the rising profile of the residential and commercial property industry.

“Sectors are a more diversified way for an investor to target opportunities where they broadly want exposure,” says Kyle Hart, founder at Coastal Wealth Planners, an investment advisory firm based in Manahawkin, N.J. “For investors, the sector-based approach avoids the risk of targeting an individual company” while still positioning themselves for growth in a broader industry.

The 11 GICS Stock Market Sectors

The Energy Sector

The energy sector comprises stocks that are involved in extracting, refining and transporting fossil fuels. These can include businesses engaging in the exploration, production, refining and marketing of oil and natural gas, such as oilfield service firms, pipeline and fuel storage companies and companies involved in coal mining. Strangely, the sector does not include most renewable energy companies, which are generally considered either utilities or industrials.

  • Example Sector Fund: Vanguard Energy ETF (VDE)
  • Example Sector Stocks: Suncor (SU), ExxonMobil (XOM), Peabody Energy (BTU)

The Materials Sector

Companies grouped in the materials sector have a primary business involving extracting or processing raw materials or producing materials for use in manufacturing. Materials stocks include mining companies, chemical processors, construction supply firms and companies that produce or refine metals like steel or copper.

  • Example Sector Fund: iShares Global Materials ETF (MXI)
  • Example Sector Stocks: International Paper (IP), DowDuPont (DWDP), Vale (VALE)

The Industrials Sector

The industrial sector encompasses a very wide range of companies that manufacture capital goods, build infrastructure and provide transportation services. Industrial sector stocks include companies that build capital goods like aircraft, electrical equipment, industrial machinery and defense hardware; airlines, railroads and logistics companies; and large engineering firms that build roads, bridges and ports.

  • Example Sector Fund: iShares U.S. Industrials ETF (IYJ)
  • Example Sector Stocks: General Electric (GE), 3M (MMM), Lockheed Martin (LMT)

The Consumer Discretionary Sector

Consumer discretionary companies are in businesses that depend primarily on consumer demand. The term discretionary is key here as it tells you that these companies sell goods that people purchase with their disposable income, rather than day-to-day necessities. This sector covers a very wide range of different brick-and-mortar and ecommerce businesses, including apparel, luxury goods, automobiles, hotels and restaurants, and various travel-related firms.

  • Example Sector Fund: Vanguard Consumer Discretionary ETF (VCR)
  • Example Sector Stocks: Nike (NKE), Starbucks (SBUX)

The Consumer Staples Sector

The consumer staples sector provides all the basic necessities of life, from food and beverages to soap and toothpaste. It also includes producers of tobacco and alcohol. The sector contains companies that produce these goods as well as those that sell them.

  • Example Sector Fund: Consumer Staples Select Sector SPDR Fund (XLP).
  • Example Sector Stocks: Costco (COST), Walmart (WMT), Procter & Gamble (PG)

The Health Care Sector

Stocks in the health care sector can be broadly classified in two groups: companies that develop and manufacture pharmaceuticals and ones that either provide health care services or make the goods used in providing health care. On the pharmaceuticals side, you’ll find companies that do drug research and development as well as the firms that support them. On the health care services side, there are hospitals, medical equipment manufacturers and health insurance companies. Cannabis stocks are also generally included among the health care sector.

  • Example Sector Fund: Vanguard Healthcare ETF (VHT)
  • Example Sector Stocks: Pfizer (PFE), UnitedHealth Group (UNH), CVS Health Corp. (CVS)

The Financials Sector

The financials sector might be the most straightforward of the bunch—if your main business is money, then you’re in the financials. Banks, brokerage firms and insurance companies make up the bulk of the sector.

  • Example Sector Fund: Financial Select Sector SPDR Fund (XLF)
  • Example Sector Stocks: Bank of America (BAC), Goldman Sachs (GS), MetLife (MET)

The Information Technology Sector

The information technology sector can be broadly divided into two parts: software and hardware. Companies that manufacture semiconductors, computer and server components, and other types of computer hardware are the heart of the sector. Then there are the software developers and services providers, from database giants to corporate software titans. Finally, more and more internet businesses have come to dominate the sector, although there are a fair amount of internet companies that find themselves classified under other sectors given their businesses—Amazon, for instance, is a consumer discretionary stock.

  • Example Sector Fund: Vanguard Information Technology ETF (VGT)
  • Example Sector Stocks:Oracle (ORCL), Microsoft (MSFT), IBM (IBM)

The Communication Services Sector

The communications services sector was formerly known as the telecom sector. That accounts for one portion of its members: telecoms, including both wireless networks and the remaining providers of old-school landline services. The more dynamic portion of the sector includes media and entertainment companies, including legacy radio and television companies as well as the interactive media and internet entertainment firms that are slowly replacing them.

  • Example Sector Fund: Communication Services Select Sector SPDR Fund (XLC)
  • Example Sector Stocks: Verizon (VZ), AT&T (T), ViacomCBS (VIAC)

The Utilities Sector

Like financials, the utilities sector is another straightforward proposition: It groups utility companies, like those that generate and distribute electricity, provide natural gas to homes and businesses, and own and manage water resources. No matter which particular company you look at, there are generally very high barriers to entry to the utilities business given their incredibly capital-intensive needs, and many utilities are highly regulated monopolies in the geographical area they operate in. That makes them low-risk, low-volatility investments that can provide predictable, steady returns over long periods of time.

  • Example Sector Fund: Utilities Select Sector SPDR Fund (XLU)
  • Example Sector Stocks: Exelon, (EXC), American Water Works (AWK), NextEra Energy (NEE)

The Real Estate Sector

The real estate sector groups companies that develop and manage large real estate projects together with most real estate investment trusts (REITs), except mortgage REITs, which are included in the financial sector.

  • Example Sector Fund: Vanguard Real Estate Index Fund (VNQ)
  • Example Sector Stocks: American Tower (AMT), Public Storage (PSA), and Digital Realty Trust (DRT)

Stock Market Sectors and Your Portfolio

How should everyday investors leverage sector stocks to expand their own investment portfolio opportunities? Experts advise using as many of the GICS sectors as possible and spreading assets around to diversify their holdings and help protect their investing dollars from risk.

“A diversified portfolio must first have the appropriate dispersion among asset classes (i.e., stocks, bonds, and cash) as a foundation,” Hart says. “Sectors become extremely important to ensure diversified exposure within the stock asset class.”

For example, two investors may both have 60% stocks, 40% bonds as their allocation—yet Investor A may have all of their stock exposure in technology or real estate while Investor B has exposure across all 11 stock sectors.

In that scenario, Investor A would have an extremely different outcome in major market crisis moments like the dotcom crash of 1999-2000 or the housing bubble of 2007-2008.

“Diversified sector exposure ensures that directly correlated events like the technology stock crash or the real estate bubble don’t derail a portfolio,” Hart says.