What are the S&P Sectors?
The S&P sectors is a method of sorting publicly traded companies into 11 sectors and 24 industry groups. Created by Standard & Poor’s (S&P) and Morgan Stanely Capital International (MSCI), it is also known as the Global Industry Classification Standard (GICS). S&P sorts company into the sectors based on their primary business activity.
What are they used for?
Sector breakdowns help portfolio managers and investors determine the allocation of funds within a portfolio. If an investor wants to create a diversified portfolio, the portfolio should have stocks from all if not most of the sectors. For smaller investors seeking to have a diversified portfolio, it is possible for them to purchase exchange-traded funds (ETFs). However, if the investor is only interested in investing in technological or energy based businesses, the GICs will help narrow down possible companies.
Quick Summary Points
- The S&P sectors or Global Industry Classification Standard (GICS) organize companies based on their primary business activities.
- Investors can use the sectors to isolate stocks of specific interest or to build a diversified portfolio.
- The order of the 11 sectors based on size are Informational Technology, Health Care, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Utilities, Real Estate, and Materials.
Overview of the S&P sectors
1. Informational Technology
The informational technology sector consists of companies that develop or distribute technological items or services and include internet companies. Products that include technology is almost endless and includes computers, microprocessors, operating systems. Example of companies in this sector includes big names like Microsoft Corporation, Oracle Corp., and Mastercard Inc. This sector has seen a lot of change in recent years because of the rise in technologically based companies.
2. Health Care
Health care consists of medical supply companies, pharmaceutical companies, and scientific based operations or services that aim to improve the human body or mind. Familiar names include Johnson & Johnson a medical device and pharmaceutical company that owns Tylenol and Abiomed, which manufacture medical implant devices. In addition, cannabis companies have recently joined the health care sector. Currently, the more well-known ones are Canopy Growth Corp. and Aurora Cannabis with a market cap of $23 billion and $12 billion respectively.
The financial sector includes all companies that revolve around the movement of money. This includes banks, credit card issuers, credit unions, insurance companies, and mortgage real estate investment trusts (REITs). Companies within this sector are relatively stable as they are mostly matured and already established. Banks in this sector include Bank of America Corp, JPMorgan Chase & Co., and Goldman Sachs. Other names include Berkshire Hathaway, American Express, and Aon plc.
4. Consumer Discretionary
Discretionary consumer products are luxury items or experiences that are not necessary for survival. The demand for these items depends on the economic conditions and wealth of individuals. Products include cars, jewelry, sporting goods, and electronic devices. Luxury experiences include trips, stays at hotels, or dining in a top end restaurant. Most companies in this sector are easily recognized. Some examples include Starbucks, Best Buy Co. Inc, and Amazon.
5. Communication Services
The communication services sector consists of companies that keep people connected. This includes internet providers and phone plan providers. The more exciting part of the sector includes media, entertainment, and interactive media & services companies. Netflix Inc. and Walt Disney Co. is actually part of communication services even though the companies seem to be closely related to consumer discretionary. Other companies within the sector include AT&T, CBS Corp., and Facebook.
Industrials include a wide range of companies from airlines and railroads companies to military weapons manufacturers. Since the range of companies is so large, the sector has 14 different industries. Some of the industries are Aerospace & Defense, Construction & Engineering and Professional Services Industry. Best known names within this sector are Delta Air Lines Inc. and Southwest Airlines, FedEx Corporation, and Boeing Company.
7. Consumer Staples
Consumer staples companies provide all the necessities of life. This includes food and beverage companies, household product providers, and personal product providers. Consumer staple companies are well known since people see it in stores regularly or in their surroundings. For instance, Procter & Gamble is a famous company within this sector and produces bleach and laundry detergent under brand names such as Dawn and Tide. Another example is Kroger, which is the largest supermarket chain in the U.S. and distributes food, beverages, and household products.
The energy sector consists of all companies that play a part in the oil, gas and consumable fuels business. This includes companies that find, drill and extract the commodity. It also includes the companies that refine the material and companies that provide or manufacturer the equipment used in the process. Companies like Exxon Mobil and Chevron extract and refine gas while companies like Kinder Morgan contain and transport the oil to gas stations.
Utility companies provide or generate electricity, water, and gas to buildings and households. For example, Duke Energy generates and distributes electricity and Southern Company provides gas and electricity. Many utility companies are also developing renewable solar, wind, and hydro facilities to be more environmentally friendly.
10. Real Estate
As the name suggests, the newest addition to the S&P sectors includes all the Real Estate Investment Trusts (REITs) except for mortgage REITs. The real estate sector makes up 2.9% of the S&P 500. Companies in the sector include American Tower Corp., Boston Properties, and Equinix.
Companies within the materials sector provide the raw material needed for other sectors to function. This includes the mining companies that provide gold, zinc, and copper and forestry companies that provide logs. Companies that are not typically associated with materials but are in the sector are containers and packaging companies, such as the Intertape Polymer Group, a company that produces tapes.
To learn more about the materials sector, take a look at CFI’s Mining Valuation & Financial Model Course.
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