The stock market is massive. Over 5,000 different stocks are traded daily in the US alone and trillions of dollars shift hands with little to no friction. Such a vast market is nearly impossible to grasp on the individual level, but investors make the market malleable by chopping its contents up into different pieces and placing the portions into groups or indices.
Sometimes, investors break up stocks by market cap – large, mid, and small. Other times it’s by style (growth vs value) or region (US vs Europe vs Asia). But few of these groupings actually measure what the underlying companies do. Can you tell a company’s industry by its market cap or location? No, so investors also break stocks down into different sectors based on the type of work the company performs. Sector investing is a popular way to seek profit since you aren’t picking individual stocks, but entire industries.
Stock Sectors—What Are They?
The total number of industries in the overall stock market can be endlessly debated. Each sector is filled with various subsectors, like hospitals and pharma in the healthcare sector or hardware and software in the tech sector. Even then, these subsectors can be further broken down, such as upstream, midstream, or downstream in the oil industry.
All of this can get confusing quickly, but thankfully MSCI and S&P realized this and developed an “official” sector scorecard called the Global Industry Classification Standard (GICS). The GICS breaks the market down into 11 separate stock sectors and forms the consensus grouping of companies by industry. The 11 GICS sectors are:
- Consumer Discretionary
- Consumer Staples
- Information Technology
- Communication Services
- Real Estate
Why Are Stock Sectors Useful
Grouping stocks by sector is a helpful exercise because business cycles ebb and flow and yesterday’s winners could very well be tomorrow’s losers. The state of the economy, regulation, consumer trends, and geopolitics all have a hand in boosting some sectors while punishing others.
For example, the energy sector has lagged the broader market for years now as the world shifts focus from fossil fuels to renewable sources and former winners like Exxon-Mobil (NYSE: XOM) and Chevron (NYSE: CVX) are now almost pariahs. When the stock market experiences times of great volatility, many investors run to high-flying tech stocks for the relative safety of more stable utilities. Investment managers call this ‘sector rotation.’ In theory, rotating sectors allows investors to stay ahead of macroeconomic trends without needing to pick individual winning stocks.
Here’s a breakdown of the 11 GICS sectors with pros and cons and examples for each:
The energy sector hasn’t spent much time in the winner’s circle lately. Energy producers in this sector are mostly in the oil and gas industry. This includes oil drillers that find the raw product, shippers that store and transport the extracted oil, and refiners that purify and distribute the finished product. Companies that manufacture equipment for these processes are also in the sector.
Energy companies face high fixed costs due to expensive equipment and demand stress being greatly correlated with the overall economy. For example, oil prices plummeted last spring when the coronavirus took hold and investors realized travel was about to come to a standstill. The energy sector also must deal with constant regulatory pressure to due environmental concerns as well. The largest US energy stocks include:
- Exxon-Mobil (NYSE: XOM)
- Chevron (NYSE: CVX)
- EOG Resources (NYSE: EOG)
- Kinder Morgan (NYSE: KM)
- ConocoPhillips (NYSE: COP)
(Note that renewable energy producers are usually included in utilities, NOT energy)
The materials sector is responsible for making and distributing commonly used raw materials like chemicals, paper, plastic, metals, minerals, glass, and packaging. Most of the companies in this sector are manufacturers whose profits are often dependent on commodity prices (gold, oil, lumber, etc.).
Goods produced by the materials sector supply many other sectors, so overall economic conditions also play a role in how well materials companies perform. Here’s a sample of some of the largest US materials companies:
- Sherwin-Williams (NYSE: SHW)
- Ecolab (NYSE: ECL)
- Dow Inc (NYSE: DOW)
- PPG Industries (NYSE: PPG)
- Newmont Corp (NYSE: NEM)
Industrials and materials might look similar at first, but the main difference is industrials are concerned with capital goods while materials manufacture raw products. What types of capital goods? Airplanes, aerospace and defense projects, construction equipment, heavy machinery, freight and rails, and transportation infrastructure.
The industrials are a deep and diverse sector filled with blue chip stocks as well as up-and-coming growth companies. The largest US industrial stocks consist of a lot of familiar faces:
- Caterpillar (NYSE: CAT)
- Boeing (NYSE: BA)
- Honeywell (NYSE: HON)
- 3M Company (NYSE: MMM)
- Raytheon Technologies (NYSE: RTX)
The utilities are highly regulated energy suppliers who provide electricity and other such services to homes across the country. Utility providers are who you’re usually writing a monthly check to such as the gas company or water company. Utility company profits are capped due to regulation, so the stocks tend to be less volatile than other sectors. This is why utilities are often purchased heavily during recessions or periods of economic uncertainty. The largest US stocks in the utility sector are:
- NextEra Energy (NYSE: NEE)
- Duke Energy (NYSE: DUK)
- Southern Co (NYSE: SO)
- Exelon Corp (NSDQ: EXC)
- Dominion Energy (NYSE: D)
One of the quickest growing sectors in the US stock market is healthcare. As baby boomers begin to approach retirement age, healthcare is going to become a more and more important industry. The healthcare sector also has a wide array of industries that generally fall into two groups: service providers or drug research/production.
Service providers include hospitals, medical equipment producers, and healthcare technology firms. Drug companies include biotechs and pharmaceutical researchers. Here some of the largest US healthcare stocks:
- Johnson and Johnson (NYSE: JNJ)
- UnitedHealth Group (NYSE: UNH)
- Pfizer (NYSE: PFE)
- Abbott Labs (NYSE: ABT)
- Merck and Co (NYSE: MRK)
It’s the sector everyone loves to hate, the financials! Otherwise known as the banking sector, the financials include firms that deal with money – lending, borrowing, investing, and wealth management. Here you’ll find both commercial and investment banks, credit card companies, asset allocators, and insurance companies. The US financial sector is among the strongest and most well-capitalized banking sectors in the world. Here’s a list of the largest US financial firms (but you probably already know these guys):
- JPMorgan Chase (NYSE: JPM)
- Goldman Sachs (NYSE: GS)
- Bank of America (NYSE: BAC)
- Berkshire Hathaway (NYSE: BRK.B)
- Wells Fargo (NYSE: WFG)
Consumer Discretionary Sector
The next two sectors are similar, but their success depends on the current economic situation and consumer sentiment. The consumer discretionary sector is an elastic sector, meaning profits tend to ebb and flow with the underlying economy. Discretionary stocks often sell luxury items that do better when households are well-capitalized. Cars, apparel, durable household goods, hotels, restaurants, and retailers make up the bulk of consumer discretionary. Some of the largest US stocks in this sector include:
- Nike (NYSE: NKE)
- Home Depot (NYSE: HD)
- Target (NYSE: TGT)
- McDonald’s (NYSE: MCD)
- Booking Holdings (NYSE: BKNG)
Consumer Staples Sector
Consumer staples are the other side of coin. Unlike consumer discretionary, staples are inelastic or sticky. These companies make products that consumers need regardless of their income or economic situation, such as food, beverages, toiletries, hygiene products, grocery stores, and tobacco. Yes, tobacco and alcohol are included as staples.
This sector is often called consumer defensive since these stocks tend to be less volatile. Profits aren’t dependent on economic cycles, so these companies often become darlings during recessions. The largest US companies in this sector are:
- Proctor and Gamble (NYSE: PG)
- Walmart (NYSE: WMT)
- Mondelez International (NYSE: MDLZ)
- Altria Group (NYSE: MO)
- Colgate-Palmolive (NYSE: CL)
Information Technology Sector
The tech sector needs no introduction as it’s been hot for about a full decade now. Many of the companies in this sector began formulating during the early days of the Dot Com Bubble, but others like Microsoft have been around for decades and decades. Tech companies make computer hardware, software, and other equipment, manage databases, make products like semiconductors, or work on information systems. These companies are focused on growth and expansion and return little to shareholders via dividends. The biggest companies in this sector are now the biggest companies in the world – you likely use their products every day:
- Apple (NSDQ: AAPL)
- Microsoft (NSDQ: MSFT)
- Alphabet (NSDQ: GOOG)
- Amazon (NSDQ: AMZN)
- Meta Platforms (NSDQ: FB)
Communication Services Sector
One of the newest entrants in the GICS sector list, communication services aren’t quite tech companies but also aren’t utilities. These firms exist in a middle group where they utilize new technology to help consumers interact, but aren’t heavily regulated and controlled like utilities. Communication services include cell phone providers, network administrators, entertainment companies, media services, and telecommunications. You’ll recognize some of the largest US stocks here:
- Verizon Communications (NYSE: VZ)
- AT&T Inc (NYSE: T)
- Comcast Corp (NYSE: CMCSA)
- Charter Communications (NYSE: CHTR)
- T-Mobile US Inc (NYSE: TMUS)
Real Estate Sector
You don’t need to own property to get exposure to real estate. Many publicly traded companies provide access to this sector without the headaches of being a landlord. The real estate sector in the US is divided into two industries: non-mortgage real estate investment trusts (REITs) and real estate management/development companies. Mortgage-based REITs are placed in the financial sector. The biggest REITs and real estate developers in the US are:
- American Tower (NYSE: AMT)
- Simon Property Group (NYSE: SPG)
- Equinix (NSDQ: EQIX)
- Public Storage (NYSE: PSA)
- Equity Residential (NYSE: EQR)
Sector investing can give you the best of both worlds – diversification without having to suffer lagging industries. If you want to invest in specific industries, you can do so without taking the risk of buying individual stocks. Maybe you want to leave the oil and gas industry behind or maybe you think tech is looking a bit frothy and want less volatile equities in the utilities and consumer staples sector. You don’t need to understand all the industries in a particular sector, but learning how they function in relation to other sectors and in different economic environments is crucial for successful investing.
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