The US stock market includes thousands of companies, and it’s easy to get analysis paralysis when thinking about choosing what to invest in. To help simplify things a bit for investors, the stock market is divided into several different sectors that include companies with similar characteristics.
The different sectors of the stock market have several benefits, including helping people build well-diversified investment portfolios and understanding market behavior.
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Wondering how different stock sectors affect your portfolio? The answer is to choose a total market fund that can help you include all 11 sectors in your portfolio. “For the vast majority of investors, the most prudent strategy is to diversify widely across all sectors of the stock market,” said Robert Johnson, professor of finance at Creighton University’s Heider School of Business.
Read on to learn what stock market sectors are and why you want to include some of them in your investment portfolio.
what are stock sectors and how many are there?
A stock sector is a group of public companies that share similar business activities, products and services, or characteristics. there are 11 sectors of the us stock market.
stock market sectors are created by the global industry classification standard (gisc), which was developed by s&p dow jones indices and msci in 1999. the structure is used globally and is the basis for many mutual funds and stock exchanges. exchange-traded funds (ETFs).
the framework created by the global industry classification standard (gics) has four levels that divide companies into 11 sectors, 24 industry groups, 69 industries and 158 sub-industries.
how can I include sectors in my investment portfolio?
all 11 stock market sectors play an important role in the us. uu. stock Exchange. And today it’s easier than ever for investors to gain exposure to an entire portfolio without investing in individual companies.
Sector mutual funds and ETFs allow investors to buy shares in hundreds of companies in a sector with a single investment. For example, if you want to get into the materials sector, a popular ETF is IShares Global Materials ETF (Mxi). And a popular sector ETF for finance would be the Select Financial Sector SPDR Fund (XLF).
“if one wanted broad exposure to the information technology sector in the united states, one might choose ishares u.s. ETF (IYW) technology,” Johnson said. “The largest holding in this ETF is Apple, which comprises 19.2% of the portfolio, followed by Microsoft and Google with 16.3% and 11.8%, respectively.”
Sector breakdowns are not only a convenient way to classify companies in the market, but also make it easy for investors to ensure they have a well-diversified portfolio. Portfolio diversification is important because it guarantees you exposure to all parts of the stock market. Not all sectors are correlated, which means that when some sectors are doing well, others may underperform.
“While some investors are able to predict which sector will outperform another, it is difficult to do so,” said Campos.
Instead of trying to guess which sectors will be the winners at any given time, financial experts recommend building a portfolio that includes all the different sectors, often through a total stock index or an S&P 500 index fund. Total Market Index Fund is a great way to keep your portfolio diversified, while also getting a piece of the 500 largest companies in the US. uu. stock Exchange.
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“For just about any investor, I would recommend the US Stock Market Total Fund. uu. as the only us fund uu. investment in stocks you need,” Campos said.
the 11 stock sectors
Knowing the different sectors of the stock market can give you a greater understanding of not only your own investment portfolio, but the stock market as a whole. Below you can find a description of each of the 11 stock market sectors, as well as the largest companies within them.
The energy sector is made up of companies that work in energy sources, equipment and services. Companies in this sector engage in a wide range of products and services, including drilling, energy exploration and production, storage and transportation, marketing, refining, and more. the energy sector does not include most renewable energy companies. instead, it is primarily dominated by oil and gas, along with coal and other consumable fuels.
some of the most important companies in the energy sector are exxonmobil and chevron.
The materials sector is made up of companies that manufacture and market goods used in manufacturing. the materials sector includes companies that produce chemicals, construction materials, containers & packaging, metals, paper and forest products.
some of the largest companies in the materials industry are sherwin-williams and dupont.
The industrial sector includes companies in a wide range of different goods and services. Industry includes aerospace and defense, construction, engineering, electrical equipment, machinery, business supplies, transportation, infrastructure, and some professional services.
some of the most important companies in the industrial sector are honeywell, boeing and union pacific.
discretionary consumer sector
The consumer discretionary sector is made up of those companies that produce goods that consumers want but do not necessarily need. these companies tend to be cyclical, as they do well when the economy is booming, but not when the economy is down.
“consumer discretionary are luxury items that consumers buy that are not necessary to survive,” said mychal campo, head of upgrading investments. “I mean things like cars, jewelry, sporting goods, and electronic devices.”
some of the largest companies in the consumer discretionary sector include amazon, tesla, and home depot.
basic consumption sector
As opposed to consumer discretionary products, the consumer staples category is made up of those products that people see as necessities and that are sold no matter what the economy is doing. Included in the consumer staples sector are food, beverages, tobacco, household products, and personal care products.
some of the most important companies in the consumer staples sector are procter & Gamble, Walmart, and Coca-Cola.
The healthcare sector has two main categories of companies: healthcare equipment & service companies and pharmaceutical and biotechnology companies. the sector covers everything from health equipment, supplies, distributions, services, facilities, technology, research, development and more.
“Health care can include pharmaceutical companies and other medical supply companies,” Campos said. “Cannabis companies are also part of health care.”
some of the largest companies in the healthcare sector are johnson & johnson, united health group and pfizer.
The financial sector includes companies in areas of finance. Some of the most common industries in this sector include banking, mortgages, financial services, consumer finance, asset management, capital markets, financial exchanges, retirements, insurance, and more.
some of the most important companies in the financial sector are berkshire hathaway, visa and jpmorgan chase.
information technology sector
The information technology sector includes a wide range of companies involved in the manufacture, distribution, marketing and more of both hardware and software. Some of the most common components within this sector include IT services, software, communication equipment, hardware, electrical equipment, and more.
some of the biggest companies in the technology sector are apple and microsoft.
communication services sector
The communication services sector includes many companies in two main communications categories: telecommunications services and media & entertainment. On the telecommunications services side, you’ll find wireless, fiber optic, cable, and internet service providers. in the media & the entertainment side is media and broadcast companies, as well as entertainment companies, streaming services, social media, and more.
Some of the biggest companies in the consumer services industry include Facebook and Alphabet (the parent company of Google).
public services sector
We have already talked about the energy sector, which includes companies that explore, produce and store energy sources. The utilities sector is made up of those companies that deliver energy sources to consumers. includes electric and gas utilities, water utilities, and many renewable energy companies.
some of the largest companies in the utility industry include duke energy, nextera energy, and southern company.
The real estate sector is made up of companies dedicated to the promotion and management of real estate. A large part of this sector is made up of real estate investment trusts (REITs), but it also includes other real estate leasing, management and development companies.
Some of the largest real estate companies are American Tower Corp. and simon property group.