Stock market sectors and industries help investors make sense of a complex market. By grouping similar companies together, they offer a useful lens for understanding market trends, economic shifts, and investment opportunities. Here's what sectors are, why they matter, and how to invest in them.
What are sectors?
Sectors are groups of companies that sell similar products or services—or that have similar types of companies buying their products and/or services. Sectors are one of the most popular ways that investors divide and categorize the stock market. Investors use sectors to make it easier to compare companies, diversify their portfolios, and analyze the entire market's performance. The Global Industry Classification Standard (GICS) sorts every publicly traded company into 11 different sectors to help investors with their analysis.
Market sectors vs. economic sectors
Market sectors group publicly traded companies by the products or services they provide, such as health care or energy. Economic sectors, in contrast, categorize the broader economy based on the type of activity being performed, such as extracting natural resources, manufacturing goods, or providing services. Both frameworks help organize economic activity into meaningful groups, but they serve different purposes. Market sectors are primarily used for investing and stock analysis, while economic sectors provide a broader view of how different parts of the economy are growing or contracting.
Sectors vs. industries
Sectors represent broad segments of the market, while industries are a more zoomed-in way to classify companies. To organize companies, GICS uses a 4-level hierarchy, with sectors being the broadest: sectors, industry groups, industries, and sub-industries. There are 11 sectors, 25 industry groups, 74 industries, and 163 sub-industries. This structure allows investors to consistently compare a company's performance to its peers.
What does that look like in practice? Consider a fictional freight railroad company, Example Railways. Here's where it would fit within the GICS framework:
Example Railways (company) > Railroad (sub-industry) > Road & Rail (industry) > Transportation (industry group) > Industrials (sector)
What are the 11 sectors of the stock market?
The GICS categorizes the stock market into 11 broad sectors, along with each one's assigned code number.
Energy (10)
The energy sector includes companies involved in producing, refining, transporting, and selling energy resources, as well as businesses that provide energy-related equipment and services. Stocks in this sector are highly correlated to the price of commodities such as crude oil and natural gas.
Materials (15)
The materials sector contains a wide variety of commodity-related manufacturing companies. This includes companies that make everything from paper to steel, minerals and mining companies, and producers of construction materials.
Like the energy sector, the materials sector is highly correlated to the price of commodities. Whereas energy stocks are sensitive to the price of energy resources, materials stocks are sensitive to the price of metals such as gold, copper, and steel.
Industrials (20)
The industrials sector includes companies that manufacture and distribute capital goods, provide transportation services, or support businesses through commercial services and supplies. As a result, the sector spans a wide range of industries, from defense contractors and airlines to construction and engineering firms.
Consumer discretionary (25)
The consumer discretionary sector is organized into several segments, including businesses ranging from hotels, restaurants, and leisure facilities to automotive manufacturing, household durable goods, and textile manufacturing.
Consumer staples (30)
The consumer staples sector includes manufacturers and distributors of personal products and non-durable household goods, as well as beverages and tobacco. Food and drug retailers are in this sector as well, along with some consumer super centers.
Health care (35)
The health care sector contains distributors of health care products, providers of basic health care services, and owners and operators of basic health care facilities and organizations. It also includes those involved in the research, development, production, and marketing of pharmaceuticals and biotechnology products, as well as manufacturers of health care equipment and supplies.
Financials (40)
The financials sector contains banks, thrifts, and mortgage finance companies, diversified financial services, mortgage real estate investment trusts (aka REITs), consumer finance companies, capital markets, and insurance companies.
Information technology (45)
The information technology sector includes companies that develop software, manufacture computers and other hardware, produce semiconductors, and provide technology services such as cloud computing and cybersecurity.
Communication services (50)
Closely related to the information technology sector, the communication services sector contains companies that provide telecommunications services through fixed line, fiber optic, wireless, cellular, and high bandwidth networks. This sector also includes media, interactive media and services, and entertainment.
Utilities (55)
The utilities sector contains companies that provide gas, electric, or water services, along with companies that independently produce and distribute power.
Real estate (60)
The real estate sector contains all REITs (with the exception of mortgage REITs), as well as real estate management and development companies.
Why do sectors matter for investors?
Sectors matter because they help investors understand what's happening in different parts of the market. With thousands of publicly traded companies to analyze, identifying trends and understanding what's driving market performance can be challenging. Broad market indexes may overlook important details, while researching individual stocks can be very time-consuming. By grouping similar companies together, sectors help make it easier to:
- Understand benchmarks: By looking at the sector performance within major indexes, it can help investors see what parts of the market are currently driving gains or losses.
- Diversify portfolios: Spreading investments across multiple sectors could reduce risks that come with being too concentrated in one part of the market.
- Compare companies: Comparing multiple stocks within the same sector can, in some cases, make performance assessments a bit more straightforward, since the companies may be exposed to relatively similar market forces and business dynamics.
- Potentially capitalize on trends: For example, the consumer discretionary sector tends to do better when people have extra money to spend. The financial sector tends to benefit when interest rates rise. And the technology sector often gains momentum when new innovations emerge. Keep in mind, though, that past performance doesn't guarantee future results.
How to invest in sectors
You can invest in sectors in a few different ways. The right approach depends on how hands-on you want to be and how much risk you're comfortable taking on. Here are 3 common ways to invest in sectors:
- Sector-specific mutual funds: Sector mutual funds invest in a curated collection of companies within a single sector. These funds are often actively managed, meaning a professional portfolio manager chooses which stocks to include. This approach generally comes with higher expense ratios.
- Sector-specific exchange-traded funds (ETFs): Sector ETFs also focus on a specific part of the market, and most track an index rather than relying on a portfolio manager to pick stocks. Some sector ETFs hold a large share of the companies in a sector, making them a popular way to gain broad exposure at a relatively low cost.
- Individual stocks: Investing in individual stocks allows you to choose specific companies within a sector. This approach gives you more control, but it also requires more research and comes with higher risk, since your performance depends on how each individual company does.