As an investor, you probably have heard of the S&P 500 or the Standard & Poor’s 500 Index and its sectors. It is a very popular index used to track the performance of the U.S. stock market.
It is considered a representation of the American economy in its entirety because it is based on the market capitalization of the largest 500 companies trading on major stock exchanges such as the New York Stock Exchange (NYSE). The S&P 500 classifies these companies into different sectors and industry groups, which we will discuss in this article.
What Are the S&P 500 Sectors & Industry Groups?
The S&P 500 uses a method of dividing the constituent companies based on their business activities. The companies are divided into 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries. A stock is assigned a code that identifies it across these four levels. This type of classification was introduced by S&P and MSCI (Morgan Stanley Capital International) and is called the Global Industry Classification Standard (GICS).
A sector categorizes companies with similar economic features, whereas industries have a more narrow focus and are subcategories that group similar businesses. For example, the healthcare sector is divided into several different industries, such as pharmaceuticals and biotechnoloy.
GICS is one of the two primary systems that economists and investors use to compare companies. The GICS has grouped stocks accounting for more than 95 percent of the market capitalization in the world. Investors, analysts, and portfolio managers use this classification system to analyze stocks. While this system is a benchmark for the S&P 500 and other indexes, it has some limitations.
GICS looks only at the biggest companies based on their market caps. Investors can definitely make profits by investing in these large-cap stocks but may miss out on smaller returns from medium and small-cap firms not included in the S&P 500. Being aware of this limitation is particularly important for investors who want to build a diversified portfolio.
Another limitation of using the GICS grouping is that the vertical industry focus does not fit well into the modern world. Most of the large companies in the index grew big, had huge physical factories, and established themselves in the Industrial Age. On the other hand, today’s corporate giants focus on hardware, software, fast growth, and earnings. As a result, many believe that the GISC system is outdated and needs to be adjusted to reflect today’s giants’ scope.
Why Are Sectors & Industry Groups Important & How Do Investors Use Them?
Sectors and industry groups allow investors to compare any company with its competitors. If you are interested in a stock, it is important to learn more about its rivals to make sure it will actually be a profitable investment. Analyzing sectors and industry groups helps you learn about how businesses interact with each other. This type of grouping can help investors when used as a guideline for allocating funds within their portfolios. Investors can easily build a diversified portfolio by including various sectors and industry groups in their stock portfolios.
Small investors can create diversified portfolios by investing in Exchange Traded Funds (ETFs) of an index. These funds give investors a diversified portfolio with exposure to various investments in a sector or industry without having to research individual stocks.
However, if investors are interested in particular sectors and industry groups, they can limit the investment to their areas of interest. In addition, companies’ classification into sectors and industries helps investors compare competitive companies in the same industry when looking for investment opportunities. This is because companies within the same industry have similar features and are affected by the same factors, outside forces, and risks.
The 11 Sectors of the S&P 500
Communication services is one of the newest sectors in the market and was formerly called telecom. This sector contains everything from media and entertainment to telephone plans and internet providers. Big names like Walt Disney and Netflix are parts of this sector.
The communication services sector experienced a growth of 61.3% over a 10-year period ending on 12/31/19. Media and Entertainment are two of the biggest industries in this sector.
This sector contains companies offering luxury products and services that are not necessities. Businesses in this sector have rising and falling demand dependent on the state of the economy. Some of the most common product categories include restaurants, sporting goods, jewelry, cars, and travel.
This sector grew by 315.42.6% in the 10-year period ending on 12/31/19, while the S&P 500 grew by 207.89% during that time. Examples of companies in this sector include Amazon and Starbucks. The Consumer Discretionary sector covers industries like Automobiles and Hotels, Restaurants & Leisure, Textile, Apparel & Luxury Goods.
The businesses in this sector provide the necessities of life. The consumer staples sector includes personal products, food and beverages, and household products. Consumer staples companies are popular because people use the products daily. Examples of stocks in this sector are Kroger and Coca-Cola.
This sector experienced a growth of 136.50% during the last 10-year period ending on 12/31/19. Household Products and Beverages are industries that fall under this sector.
This sector includes companies engaged in oil and natural gas operations like production, exploration, refinement, and marketing of coal, oil, and natural gas. The sector also covers related businesses providing equipment and services to these producers.
The energy sector grew by 18.82% in the 10-year period ending on 12/31/19. Some of the major stocks in this sector are Chevron and Exxon. It includes the Oil, Gas & Consumable Fuels Industry and Energy Equipment & Services Industry.
The financial sector covers businesses and financial services associated with money handling, investing, and finance and includes insurance companies, banks, mortgage real-estate investment trusts, credit card companies, brokerage firms, and finance providers.
The financial sector has grown by 180.57% during the 10-year period ending on 12/31/2019. Visa and Bank of America are examples of stocks falling under this sector. It covers industries like Insurance, Consumer Finance, Capital Markets, and Banking.
The healthcare sector includes pharmaceutical and medical supply companies and other operations associated with improving the mind and body. Some of the most popular names in this sector include Johnson & Johnson and cannabis giant Aurora Cannabis.
The healthcare sector has grown by 265.51% during the 10-year period ending on 12/31/19. The sector consists of industries like Pharmaceuticals, Biotechnology, and Healthcare Technology.
The industrials sector covers many businesses involving the use of heavy equipment. It includes airlines, railroads as well as military manufacturers. The most popular examples of Industrials stocks are Boeing Company and Delta Air Lines.
The sector showed a 10-year growth of 182.32%. Two of the biggest industries in this sector are Construction & Engineering and Aerospace & Defense.
The premier sector of the 21st century is the information technology sector, and it covers almost all the industries of the modern-day world. It includes businesses involved in various categories of technology, including software, hardware, and semiconductors. The most popular examples of technology stocks are big names like Microsoft, Google, and Apple.
The IT sector grew by 391.03% during the 10-year period ending on 12/31/19. Some of the notable industries in the sector are Software and IT Services.
The materials sector comprises businesses providing goods and raw materials used in other sectors. These companies manufacture, log, and mine metals, chemicals, wood, and industrial materials. Some of the most well-known companies are DuPont and Ecolab.
This market segment grew by 105.18% during the 10-year period ending on 12/31/19. The top industries in this sector are the Chemicals and Metals & Mining industry.
Real estate is one of the fastest-growing sectors and covers companies developing, owning, leasing, and managing land and property. It makes up about 3% of the S&P 500 and includes companies like American Tower and Simon Property Group.
The real estate sector grew by 21.29% since its inception 3 years ago. It consists of industries – Real Estate Management & Development and Equity Real Estate Investment Trusts.
This sector provides necessary services like gas, water, electricity, and more to households. Stocks include local water and electricity companies like Dominion Resources and Exelon and other utility companies.
This sector recorded a growth of 111.38% during the 10-year period ending on 12/31/19. The sector consists of industries such as Water, Gas, Electric, and Multi Utilities.
What Are the Biggest Sectors in the S&P 500?
Here is an overview of the various sectors based on market capitalization. Market cap is the total market value of all the outstanding shares of the company. The sector market cap is the total value of all the S&P 500 companies in the industries that are part of a particular sector.
As of September 30, 2020, the technology sector is the biggest among all the sectors in the S&P 500 and has a weight of 28.2% in the index. This sector includes industries like hardware, software, technology, IT services, semiconductors, and others.
The next largest sector in the S&P 500 based on market capitalization is the healthcare sector, with a 14.2% weight. Some of the biggest industries in this sector include pharmaceutical and medical supply companies. The next largest sector is the consumer discretionary sector, with a weight of 11.6%, closely followed by the financial sector with 10.8% weight.
The smallest sectors are the energy sector and the real estate sector with a weight of 2.1% and 2.6%.
Market Sector Performance
The performance of market sectors is an important consideration when investing. Therefore, it is worth going beyond size and comparing the performance of a sector with others. An effective way to measure this is by comparing the sector’s performance with the market in its entirety. For example, comparing a sector’s performance with the S&P 500 index’s performance explains how the sector performs in the stock market.
The idea is to compare a sector’s historical performance to benchmarks like the S&P 500 index, the Dow Jones Industrial Average, or the Nasdaq Composite.
For example, when analyzing every sector’s 10-year performance compared to the S&P 500 for the term ending 12/31/2019, you can get an insight into what sectors you should consider investing in.
The sectors that outperformed the S&P index are the best for investment based on returns. This means your best investment sectors are the information technology sector that grew over a 10-year period ending 12/31/19 by 391%. In addition, the consumer discretionary sector grew by 315% versus the S&P’s growth of almost 208% in that same period. Healthcare also had higher growth than the S&P 500 as the healthcare sector grew by 265% during that same 10 year period.
The other 8 sectors did not perform as well as the S&P 500 index, with the energy and communications sectors showing the lowest performance with 19% and 61%, respectively. Of course, some industries will show higher returns within each sector, and some industries will show lower returns than their sector return. Nevertheless, finetuning industry analysis can increase investment returns significantly when done correctly.
Tips for Investing In Market Sectors
Investing in market sectors can be very lucrative. However, there are some key points you should keep in mind. The easiest way to invest wisely is to buy a mutual fund or an Exchange-Traded Fund (ETF) of a sector. You can also choose a sector and buy stocks representing one or more industries in that sector.
The best sectors to invest in are those with the biggest market caps. However, you should also consider the sector’s historical performance and risks associated with the sector. Looking at these aspects, you can determine how a sector can help you diversify your investment portfolio and accomplish your financial goals.
It is also important to keep a watch on market trends and the global economy. This is because some sectors can become more appealing at certain periods. Identifying significant market moves during seasonal cycles can help you adjust your portfolio to minimize the result of downward trends and profit from upward trends in the sectors.
Diversification is the key when you invest in market sectors. Diversifying your portfolio across sectors and industries will help you balance the risks. For example, if a sector underperforms, you can balance it with another sector that performs well.