If you’re an investor and want to broadly diversify your portfolio, you’ll need to own companies across the market. That’s why it’s useful to know that the market is divided into 11 sectors, composed of 24 industry groups and 69 industries. This system is called the Global Industry Classification Standard (GICS) and it shapes how ETFs and mutual funds are constructed.
Here’s how GICS works and its 11 sector classifications, including some top companies in each.
What is the GICS system and why is it important?
The GICS system forms the basis for how companies are divided and subdivided, and that division ultimately impacts how many sector-based index funds are created and which companies are included and left out of any given index. The classification system shapes that decision. GICS was developed in 1999 by MSCI and Standard & Poor’s, two giants in the financial industry.
The classification system gets fairly granular, and includes the following groupings in descending order:
- Industry groups
The GICS system is revised from time to time, especially as industries grow and develop. For example, real estate is the newest addition to the categorization. Real estate companies and REITs were moved from the financials sector to their own separate sector in 2016. The move was due to the increasing growth and importance of real estate, especially equity REITs.
This move helped recognize the development of the real estate sector as not just a financial player, and the reclassification had a powerful impact on the sector, driving more money to the stocks of those companies. Large fund companies that managed index-based funds had to buy more of these real estate stocks in order to match the new weightings in the sector index.
So it’s a big deal when the GICS classification changes or a company is added to or removed from the schema. The move could cause significant buying or selling of affected stocks, and may even change the company’s ability to access cheaper funding.
One alternative to the GICS schema is the Industry Classification Benchmark, or ICB. The ICB was developed in 2005 by Dow Jones and FTSE, and divides the market into 11 industries, 20 supersectors and then further into sectors and subsectors. It’s now used by the NASDAQ, NYSE and other international markets.
11 sectors of the stock market
Below are the 11 sector classifications, including a description of the companies in the sector as well as a few of the largest or most well-known companies. Also included is a popular index fund that allows you to invest in the sector with a low expense ratio.
The energy sector includes companies engaged in exploration and production of oil and other hydrocarbons, refining, the transportation of oil and gas, and production of oil and gas equipment. The sector is generally mature with modest growth.
Some of the best-known companies: Chevron, ExxonMobil, Halliburton
Popular sector ETF: Vanguard Energy ETF (VDE)
The materials sector includes companies that produce chemicals, glass, paper, forestry products, metals, packaging, construction materials and steel. It tends to be a mature industry with modest growth potential.
Some of the best-known companies: Dow, DuPont, Sherwin-Williams
Popular sector ETF: iShares Global Materials ETF (MXI)
The industrials sector includes companies that manufacture aerospace and defense products, electrical equipment and construction equipment. It also includes companies providing security services, employment services, professional services and transportation services. This sector may show strong growth during economic booms.
Some of the best-known companies: 3M, Caterpillar, Delta Air Lines
Popular sector ETF: iShares U.S. Industrials ETF (IYJ)
4. Consumer discretionary
The consumer discretionary sector includes companies that produce cars, durable goods, clothing and leisure equipment. It also includes restaurants, hotels and consumer retailing, among others. This sector is sensitive to economic cycles, so when the economy grows, these companies tend to grow much more quickly, though when it slows, this industry typically slows even more.
Some of the best-known companies: Amazon, Ford Motor Company, Home Depot
Popular sector ETF: Vanguard Consumer Discretionary ETF (VCR)
5. Consumer staples
The consumer staples sector includes companies that produce food, drinks and tobacco, and non-durable household goods as well as those retailers that sell food and drugs, including retailing supercenters. This industry tends to be mature with modest growth.
Some of the best-known companies: Coca-Cola, Procter & Gamble, Walmart
Popular sector ETF: Consumer Staples Select Sector SPDR Fund (XLP)
6. Health care
The health care sector includes companies that provide health care services, as well as health care equipment and technology. It includes companies at all stages of pharmaceutical and biotech research, development and production. This sector can be dynamic and exhibits above-trend growth, with some very quickly growing companies.
Some of the best-known companies: Pfizer, Johnson & Johnson, UnitedHealth
Popular sector ETF: Vanguard Healthcare ETF (VHT)
The financials sector consists of companies involved in banking, including mortgage and consumer finance, as well as investment banks, brokerage firms and insurance companies. The sector has shown robust growth and profitability, but can be affected significantly by the trend of interest rates, causing cyclicality.
Some of the best-known companies: Bank of America, Berkshire Hathaway, JPMorgan Chase
Popular sector ETF: Financial Select Sector SPDR Fund (XLF)
8. Information technology
The information technology sector includes companies that produce software and other IT products and services. It also contains companies that manufacture hardware such as communications equipment, mobile phones, computers and semiconductor equipment. This sector has been a fast grower and contains some of the market’s largest companies.
Popular sector ETF: Vanguard Information Technology ETF (VGT)
9. Communication services
The communication services sector includes telecommunication and media companies, entertainment companies and those producing content and interactive games. This sector can offer significant growth opportunities as the world moves more online, but older companies face significant challenges from more dynamic entrants.
Some of the best-known companies: Disney, Facebook, Verizon
Popular sector ETF: Vanguard Communication Services ETF (VOX)
The utilities sector includes companies providing electricity, gas and water (from conventional and environmentally friendly sources) as well as energy traders and distributors of energy. This sector is generally a slow and steady performer, rather than a growth sector. But “green” energy offers the promise of higher returns, although with higher risk.
Some of the best-known companies: Dominion Energy, Duke Energy, NextEra Energy
Popular sector ETF: Utilities Select Sector SPDR Fund (XLU)
11. Real estate
The real estate sector includes real estate services companies, real estate developers and equity REITs. This sector may offer strong growth opportunities, but shows steady growth overall.
Some of the best-known companies: American Tower, Public Storage, Simon Property Group
Popular sector ETF: Vanguard Real Estate Index Fund (VNQ)
Understanding where a company fits into the sector classification can be helpful as you diversify your portfolio and include companies from a broad range of sectors. Also, it’s important to remember that larger companies often may span multiple sectors or industries. While a firm may be classified in one area, it often has significant operations in others. So it can be important to see the big picture of what a company does and not get too tied down to the classification.