The U.S. stock market includes thousands of companies, and it’s easy to get analysis paralysis at the thought of choosing which to invest in. To help simplify things a bit for investors, the stock market is broken down into several different sectors that include companies with similar characteristics.
The different stock market sectors have several benefits, including helping individuals build well-diversified investment portfolios and understand the behavior of the market.
Are you wondering how the different stock market sectors affect your portfolio? The answer is to pick a total market fund that can help you get all 11 sectors into your portfolio. “For the vast majority of investors, the most prudent strategy is to broadly diversify across all sectors of the equity market,” said Robert Johnson, a professor of finance at the Heider College of Business at Creighton University.
Keep reading to learn what stock market sectors are, and why you want to include some of them into your investment portfolio.
What Are Stock Market Sectors, and How Many Are There?
A stock market sector is a group of public companies that share similar business activities, products and services, or characteristics. There are 11 sectors of the U.S. stock market.
The stock market sectors are created by the Global Industry Classification Standard (GISC), which was developed by S&P Dow Jones Indices and MSCI in 1999. The structure is used globally and is the basis for many mutual funds and exchange-traded funds (ETFs).
The framework created by the Global Industry Classification Standard (GICS) has four tiers that break companies into 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.
How Can I Include Sectors Into My Investment Portfolio?
The 11 stock market sectors play an important role in the U.S. stock market. And today it’s easier than ever for investors to gain exposure to an entire portfolio without investing in individual companies.
Sector mutual funds and ETFs allow investors to buy stock in hundreds of companies in a sector with a single investment. For example, if you wanted to get into the materials sector, a popular ETF is iShares Global Materials ETF (MXI). And a popular ETF sector for financials would be Financial Select Sector SPDR Fund (XLF).
“If one wanted a broad exposure to the Information Technology sector in the United States, one might choose the iShares U.S. Technology ETF (IYW),” Johnson said. “The largest holding in this ETF is Apple which comprises 19.2% of the portfolio, followed by Microsoft and Google at 16.3% and 11.8%, respectively.”
Not only are the sector breakdowns a convenient way to categorize companies in the market, but they also make it easier for investors to ensure they have a well-diversified portfolio. Portfolio diversification is important because it ensures you have exposure to all parts of the stock market. Not all sectors are correlated, meaning when some sectors are doing well, others might be underperforming.
“While some investors are capable of predicting which sector is going to outperform another, it’s hard to do that,” Campos said.
Rather than trying to guess which sectors will be winners at any given time, financial experts recommend building a portfolio that includes all of the different sectors, often through a total stock market index or S&P 500 index fund. A total market index fund is a great way to keep your portfolio diversified, while also getting a piece of the 500 largest companies of the U.S. stock market.
“For practically any investor, I would advise the total US stock market fund as the only U.S. stock investment you need,” Campos said.
The 11 Stock Market Sectors
Knowing the different stock market sectors can give you a greater understanding not only of your own investment portfolio, but of the stock market as a whole. Below you can find a description of each of the 11 stock market sectors, as well as the largest companies within them.
The energy sector is made up of companies that work in energy sources, equipment, and services. Companies in this sector engage in a wide range of products and services, including drilling, energy exploration and production, storage and transportation, marketing, refining, and more. The energy sector doesn’t include most renewable energy companies. Instead, it’s primarily dominated by oil and gas, along with coal and other consumable fuels.
Some of the largest companies in the energy sector are ExxonMobil and Chevron.
The materials sector is made up of companies that manufacture and market goods used in manufacturing. Included in the materials sector are companies that produce chemicals, construction materials, containers & packaging, metals, paper, and forest products.
Some of the largest companies in the materials sector are Sherwin-Williams and DuPont.
The industrials sector includes companies across a wide range of different goods and services. Included in the industrials sector are aerospace and defense, construction, engineering, electrical equipment, machinery, commercial supplies, transportation, infrastructure, and some professional services.
Some of the largest companies in the industrials sector are Honeywell, Boeing, and Union Pacific.
Consumer Discretionary Sector
The consumer discretionary sector is made up of those companies that produce goods that consumers want but don’t necessarily need. These companies tend to be cyclical since they do well when the economy is booming but not when the economy is down.
“Consumer discretionary is luxury items that consumers buy that aren’t necessary for survival,” said Mychal Campos, the head of investing at Betterment. “I’m talking about things like cars, jewelry, sporting goods, and electronic devices.”
Some of the largest companies in the consumer discretionary sector are Amazon, Tesla, and Home Depot.
Consumer Staples Sector
Opposite of consumer discretionary products, the consumer staples category is made up of those products that people view as needs and that sell no matter how the economy is doing. Included in the consumer staples sector are food, beverages, tobacco, household products, and personal care products.
Some of the largest companies in the consumer staples sector are Procter & Gamble, Walmart, and Coca-Cola.
The healthcare sector has two primary categories of companies: healthcare equipment & services companies and pharmaceutical and biotechnology companies. The sector covers everything from healthcare equipment, supplies, distributions, services, facilities, technology, research, development, and more.
“Healthcare can include pharmaceutical companies and other medical supply companies,” Campos said. “Cannabis companies are also part of healthcare.”
Some of the largest companies in the healthcare sector are Johnson & Johnson, UnitedHealth Group, and Pfizer.
The financials sector includes companies in areas of finance. Some of the more common industries in this sector include banking, mortgages, financial services, consumer finance, asset management, capital markets, financial exchanges, REITs, insurance, and more.
Some of the largest companies in the financials sector are Berkshire Hathaway, Visa, and JPMorgan Chase.
Information Technology Sector
The information technology sector includes a wide range of companies involved in the manufacturing, distribution, market, and more of both hardware and software. Some of the most common components within this sector include IT services, software, communication equipment, hardware, electrical equipment, and more.
Some of the largest companies in the technology sector are Apple and Microsoft.
Communication Services Sector
The communication services sector includes many companies across two main categories of communications: telecommunication services and media & entertainment. On the telecommunication services side, you’ll find providers of wireless, fiber-optic, cable, and internet services. On the media & entertainment side are media and broadcasting companies, as well as entertainment companies, streaming services, social media, and more.
Some of the largest companies in the consumer services sector are Facebook and Alphabet (the parent company of Google).
We’ve already talked about the energy sector, which includes companies that explore, produce, and store energy sources. The utilities sector is made up of those companies that deliver energy sources to consumers. It includes electric and gas utilities, water utilities, and many renewable energy companies.
Some of the largest companies in the utilities sector are Duke Energy, NextEra Energy, and The Southern Company.
Real Estate Sector
The real estate sector is made up of companies involved in the development and management of real estate. A large portion of this sector is made up of real estate investment trusts (REITs), but it also includes other real estate leasing, management, and development companies.
Some of the largest companies in the real estate sector are American Tower Corp. and Simon Property Group.