11 Sectors of the Stock Market & How to Invest in Them
Did you know that the US stock market is comprised of 11 stock sectors and 24 industry groups known as the Global Industry Classification Standard (GICS) and is widely used by professional investors and fund managers?
The sectors and industry groupings help traders, investors, analysts and portfolio managers to capitalise on a specific business activity such as companies who are in the banking, healthcare or retail sectors.
In this '11 Sector of the Stock Market' article, we cover the stock market sectors and the types of companies each one follows and how to trade the sector instead of just a stock within the sector (which you could also do as well). Let's dive in!
Table of Contents
What are Stock Market Sectors?
A stock market sector is a group of companies that engage in the same business activity. There are 11 sectors of the stock market which were created by Standard and Poor’s (S&P) and Morgan Stanley Capital International (MSCI) which they called the Global Industry Classification Standard (GICS) in 1999.
The GICS was designed as an investment tool to capture the evolution of different sectors. The sector categorisations are widely used by portfolio managers around the world to help determine the best places to allocate their funds. But they are useful to all types of market participants - analysts, traders, investors and portfolio managers.
By analysing the different stock sector trends analysts can gain a quick snapshot of where the money is flowing into and out of. Investors can then use this information to participate in high-performing sectors while exiting weak-performing sectors. Traders may focus on high-performing sectors that exhibit strong momentum price trends.
What are the different sectors in the stock market?
- Information Technology
- Consumer Discretionary
- Consumer Staples
- Communication Services
- Real Estate
What do the 11 Sectors of the Stock Market Represent?
Let’s now have a look at the 11 sectors of the stock market as categorised by the Global Industry Classification Standard (GICS) so you can understand a bit more about what these sectors represent. This will be useful information for the section after this when we discuss how to trade and invest in these sectors and the unique correlation they have with the business cycle.
The stock sectors list includes the following:
1. Information Technology
The information technology sector consists of companies that fall into the following industries: software and services, technology hardware and equipment and semiconductors and semiconductor equipment.
Companies within this sector often provide technological services or produce technological products. Some of the most well-known companies in this stock sector include Microsoft, Apple, Oracle, etc.
The financial sector consists of companies that fall in the following industries: banks, diversified financials and insurance. The primary business activity is related to handling money.
Companies within this sector tend to be more mature and well-established and include the likes of JP Morgan Chase, Bank of America, American Express, etc.
The healthcare sector consists of companies that fall in the healthcare equipment and services industry, as well as the pharmaceuticals, biotechnology and life science industries.
Companies within this sector tend to be quite diverse across the medical spectrum from development to consumer and include the likes of Johnson & Johnson, Pfizer, Moderna, etc.
4. Consumer Discretionary
The consumer discretionary sector consists of companies in a variety of industries which include automobiles and components, consumer durables and apparel, consumer services and retailing.
Companies that operate within this sector sell goods or provide services that are typically not essential. They tend to benefit from a strong economy where consumer spending is high and includes the likes of Amazon, Starbucks, McDonald’s, Ford, etc.
5. Consumer Staples
The consumer staples sector consists of companies that operate in industries such as food and staples retailing, food, beverage and tobacco and household and personal products.
Companies which operate in this sector tend to provide goods and services that are essential in life and are likely to be in demand in any type of economic situation. This includes the likes of Procter & Gamble, Coca-Cola, Colgate-Palmolive, Walmart and others.
6. Communication Services
The communication services sector is the newest addition to the GICS sectors list and includes industries that used to be part of other sectors, including telecommunication services and media and entertainment.
Companies operating in this sector tend to keep people connected either through telecommunication and wireless services or through entertainment. This includes companies such as Netflix, Facebook, AT&T and others.
The industrials sector encompasses a wide range of industries that fall under the capital goods, commercial and professional services and transportation groups.
Companies within this sector are generally involved in heavy equipment and include engineering companies, building machinery, airlines and more. Some well-known companies in this sector include Boeing, FedEx, Delta Airlines, etc.
The materials sector consists of companies that are focused on activities in chemicals, construction materials, containers and packaging, metals and mining and paper and forest products.
Companies in this sector include DuPont de Nemours, Dow Inc, Freeport-Mcmoran and others.
9. Real Estate
The real estate sector consists of companies that fall under industries such as real estate management and development and equity real estate investment trusts (REITs).
Companies in this sector include American Tower Corp, CBRE Group, Equinix, Simon Property Group and more.
The energy sector consists of companies that operate in the energy equipment and services industry, as well as oil, gas and consumable fuels industry.
Companies in this sector tend to extract energy commodities, refine the commodity or provide the equipment to do so. This includes companies such as ExxonMobil, Chevron, Halliburton, Oneok Inc and others.
The utility sector consists of companies that operate in industries such as electric utilities, gas utilities, multi-utilities, water utilities and independent power and renewable electricity producers.
Companies within this sector tend to provide utilities for buildings and households such as NextEra Energy, Exelon Corp, Duke Energy, American Electric Power and others.
How to Invest in the 11 Stock Market Sectors
There are a variety of ways to speculate on stock market sectors which will depend on the individual’s trading or investing style, such as day trading, swing trading, investing and so on.
Day traders of stock market sectors will focus on strong-performing sectors to capitalise on momentum-based price trends. Long-term value investors may try to find the bottom in a weak-performing sector to capitalise when the trend changes.
However, from a broader perspective, the first decision is whether or not to focus on the overall sector or find the best-performing company within a sector. Let’s take a look at the differences.
Investing in Stock Market Sector ETFs
Through the use of exchange traded funds (ETFs), both traders and investors can gain exposure to a specific sector. You can learn more about ETFs in the ‘How to Trade ETFs’ article.
Essentially, ETFs are investment funds that track the performance of a specific market such as a currency, commodity, index or sector. They allow investors to access regions or industries that may otherwise be difficult to access. There is a diverse range of ETFs available such as the Global X Robotics & Artificial Intelligence ETF.
Fortunately, there are also ETFs that cover all of the 11 sectors of the stock market! There are different fund providers that provide access to stock sector ETFs. For example, if an investor was bullish on the potential for the financial sector to rally higher due to an environment of increasing interest rates, they may choose to invest in the Fidelity MSCI Financials Index ETF, or the iShares US Financials ETFs or even the Vanguard Financials ETF.
From the Admirals Contract Specification page, you can view all of the ETFs available to trade and invest in. The image below shows a search for ‘Financials,’ which provides information on all the financial ETFs available in the Admirals trading platform:
The ETFs listed above provide investors with exposure to the financial sector without having to find individual financial stock investments. Having the ability to invest in the broader sector becomes even more useful when investing in lesser-known sectors such as utilities or materials.
Fortunately, ETF providers provide a detailed list of the individual stocks that make up the ETF. For example, the Vanguard Financials ETF profile provides details such as portfolio composition, the number of stocks held in the fund and the month-end top 10 largest holdings, as the screenshot below shows:
Through stock sector ETFs, investors can gain exposure to a broad sector without trying to find the best stocks within that sector. However, if time allows, investors can also trade on individual stocks within a sector. One way to find the best stocks within a sector is to research the top holdings of some of the most popular sector ETFs.
Fortunately, with the MetaTrader 5 trading platform provided by Admirals users can trade or invest in both stocks and ETFs from 15 of the largest stock exchanges in the world. In fact, through the Dashboard you can manage an investing account, such as the Invest.MT5 account, as well as other accounts such as the Trade.MT5 account which allows users to trade via Contracts for Difference (CFDs).
Trading via CFDs allows traders to potentially profit from both rising and falling markets while utilising leverage. This means you can control a larger position size with a smaller deposit.
Stock Sector Trends & the Business Cycle
When trading or investing in different stock market sectors, it can be very powerful to understand the correlation between sectors and the business cycle. This is because some sectors perform best during specific times of the business cycle, also known as the economic cycle, providing a huge edge for those in the know.
The typical business cycle has four phases:
1. Early cycle: This is the point in time in which the economy experiences a sharp recovery from a recession. As central banks cut interest rates in a recession to stimulate the economy, there is a lot of cheap money flowing around which helps economic indicators such as GDP and industrial figures move into the positive.
2. Mid-cycle: This is typically the longest phase in the overall business cycle. Economic activity across the board has picked up significantly and gathered momentum over time. As growth in credit is strong, monetary policy from central banks turns neutral. But, while this is the longest cycle overall, growth tends to be moderate.
3. Late cycle: At some point, economic activity will reach a peak with growth remaining positive but starting to slow. In this cycle, inflation typically rises causing central banks to tighten their monetary policy.
4. Recession: Once economic activity starts to contract, company profits start to decline causing credit to dry up and possible unemployment and lack of investment.
According to research from investment bank Fidelity, there is a tendency for some sectors to perform strongly or weakly during certain times of the business cycle. The image below from Fidelity Investments shows this clearly among the GICS stock sectors. While stock sectors' performance will vary over time, this still provides investors with a unique edge on what sectors to focus on and when.
In the image above, it’s clear to see which sectors perform strongly or weakly during certain times of the business cycle. Using this information, investors could focus on buying strong stock sector ETFs during the times of the business cycle shown above in green, while using CFDs to short-sell stock sectors during the times of the business cycle shown above in red.
Alternatively, investors could find individual stocks within each sector to speculate on. Using technical analysis could also provide additional confirmation on whether buyers or sellers are in control of a particular market. The next chapter discusses how investors can use technical analysis to help in identifying potential opportunities.
You can stay up-to-date with all the latest market analysis and global themes by registering for your FREE place in the Admirals Trading Spotlight live webinar series which takes place three times a week. In these sessions, hosted by three different traders you can learn more about what’s going on in the markets, where the opportunities are and how to trade them.
A Stock Market Sectors Trading Strategy
When trading or investing in stock market sectors there are a variety of tools that are available to individuals. These tools will typically fall under fundamental analysis or technical analysis.
- Fundamental analysis is the process of analysing economic indicators. An example of fundamental analysis would be the concepts discussed in the last section. Analysing economic indicators helps investors to understand where the economy is within the business cycle. Investors can then identify the best-performing sectors to capitalise on.
- Technical analysis is the process of analysing historical price activity through patterns and indicators. While fundamental analysis can help an individual know which sector could outperform in the future, confirming the direction and timing of the trade is also important. This is where technical analysis is mostly used. By using technical indicators, investors can confirm the trend of the market, as well as identify potential trading opportunities.
For example, after the coronavirus pandemic of 2020, central banks loosened monetary policy to help revive the economy. During this time, most economies fell into a recession as economic activity slowed down and in some cases stopped. The central bank monetary policy action helped the economy to move into an early cycle rebound where the real estate, consumer discretionary and industrials sectors tend to perform the best.
Below is a daily chart of the Vanguard Consumer Discretionary ETF (VCR) which shows a clear early cycle recovery shortly after the coronavirus pandemic:
In the daily chart above, the early cycle recovery is confirmed not only by price cycles making higher highs and higher lows but also by the order and angle of the moving averages. The 50-period (red), 100-period (green) and 200-period (blue) exponential moving averages are all moving upwards.
Moving averages shows the average price level over a specific number of bars known as the period and are used to confirm the trend. Traders and investors will also use moving averages to help to stay with the trend and not exit a trade too early.
They can also be used to identify potential turning points, as the price turned twice around the 50-period (red) exponential moving average in September and November 2020, as shown in the chart above.
Why Invest in Stock Market Sectors with Admirals?
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✔️ Open an Invest.MT5 investing account to buy stocks, shares and ETFs from 15 of the largest stock exchanges in the world.
✔️ Open a Trade.MT5 trading account to trade via CFDs to potentially profit from rising and falling markets.
One of the best ways to start is to test all the features and services listed above completely free by opening a demo trading account. This means you can buy and sell in a virtual environment until you are ready to go live. Click on the banner below to open your demo trading account.
FAQs on Stock Market Sectors
What are the 11 sectors of the stock market?
The 11 sectors of the stock market include Information Technology, Financials, Health Care, Consumer Discretionary, Consumer Staples, Communication Services, Industrials, Materials, Real Estate, Energy, and Utilities.
How many stock market sectors are there?
In the US stock market, there are 11 different stock market sectors based on the classification system known as Global Industry Classification Standard (GICS). The sectors include Information Technology, Financials, Health Care, Consumer Discretionary, Consumer Staples, Communication Services, Industrials, Materials, Real Estate, Energy, and Utilities.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.