The S&P sectors constitute 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), they are also known as the Global Industry Classification Standard (GICS). S&P sorts companies into sectors based on their primary business activity.
Uses of Breaking Down into Sectors
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 include stocks from a variety of sectors. For smaller investors seeking to create a diversified portfolio, they can easily do by investing in an index exchange-traded fund (ETF). However, if an investor is only interested in investing in, for example, technology or energy-based businesses, they can, of course, confine their investing to only the sectors they are interested in.
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 is as follows: Information Technology, Health Care, Financials, Consumer Discretionary, Communication Services, Industrials, Consumer Staples, Energy, Utilities, Real Estate, and Materials.
Overview of the S&P sectors
1. Information Technology
The information technology – IT – sector consists of companies that develop or distribute technological items or services, and includes internet companies. Technology products include computers, microprocessors, and 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 rapid rise in technology-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 manufactures medical implant devices.
Cannabis companies are a new, but rapidly growing, part of the health care sector. Currently, the more well-known ones include Canopy Growth Corp. and Aurora Cannabis, with market caps of $23 billion and $12 billion, respectively.
The financial sector includes all companies involved in finance, investing, and the movement or storage of money. It includes banks, credit card issuers, credit unions, insurance companies, and mortgage real estate investment trusts (REITs). Companies within this sector are usually relatively stable, as many are mature, well-established firms. Banks in this sector include Bank of America Corp,JPMorgan Chase & Co., and Goldman Sachs. Other notable sector names include Berkshire Hathaway, American Express, and Aon plc.
4. Consumer Discretionary
Discretionary consumer products are luxury items or services that are not necessary for survival. The demand for these items depends on economic conditions and the wealth of individuals. Products include cars, jewelry, sporting goods, and electronic devices. Luxury experiences include trips, stays at hotels, or dining in a posh restaurant. Most companies in this sector are easily recognized. Some examples include Starbucks, Best Buy, 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. are considered part of the communication services sector. Other companies within this sector include AT&T, CBS Corp., and Facebook.
Industrials include a wide range of companies, from airlines and railroad companies to military weapons manufacturers. Since the range of companies is so large, the sector has 14 different industries. Two of the largest industries are Aerospace & Defense and Construction & Engineering. The best-known names within this sector are Delta Air Lines 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 their products in stores regularly. For example, Procter & Gamble is a famous company within this sector, which 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.
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 manufacture the equipment used in the refinement process. Companies such as Exxon Mobil and Chevron extract and refine gas, while companies like Kinder Morgan transport fuel 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 developing more renewable energy sources.
10. Real Estate
As the name suggests, the newest addition to the S&P sectors includes Real Estate Investment Trusts (REITs), as well as realtors and other companies. 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 wood. Companies that are not typically associated with materials but are in the sector include container and packaging companies such as the Intertape Polymer Group, a company that produces tape.