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What are market sectors? Stock market investing, explained.

What are market sectors?

By now, many of you are familiar with market indexes such as the S&P 500, Nasdaq-100, and Dow Jones Industrial Average. These indexes represent hypothetical portfolios that track a wide variety of companies on American stock exchanges. Though they’re excellent at gauging the broader performance of the market, they’re not great at feeling out which particular segments of the market are doing well.

That said, any company or organization can make an index. After all, an index is just a hypothetical portfolio that tracks a basket of companies. And, if selection committees can make baskets of companies tracking the broader market, you bet that they can make baskets of stocks, bonds, and other financial assets that track different parts of the market. 

In the world of stocks, this is where market sectors come to play. They’re a good way to collect insight into the performance of different genres of companies in the market. As of 2021, the Global Industry Classification Standard carved out 11 sectors on markets. This can be further broken down into 24 industry groups, 69 industries, and 158 sub-industries. We’ll touch on these in the context of the 11 sectors we’re looking at today.

The 11 stock market sectors

The 11 sectors in the Global Industry Classification Standard are shared across stock exchanges and markets, which means that learning what defines each sector is a huge value-add for any investor looking to understand markets. 

However, before you jump into the list, it’s important to underscore that some companies might span one or more sectors. This is especially the case for diversified, far-reaching businesses, like Amazon. Is it a communication service, a consumer discretionary company, or an information technology company? All of the above.

Keep those two cents in the back of your mind as you’re familiarizing yourself with these sectors and what defines them.

Communication services stocks

Communication Services is the sector that broadly refers to the business of media, telecom, and entertainment. Some of the biggest communication services companies include:

  • Media conglomerates such as ViacomCBS, Fox, Live Nation, Walt Disney Co., and Netflix
  • Internet, cell, and cable providers such as Comcast, Verizon, AT&T, T-Mobile, and Charter Communications
  • Gaming/interactive media companies such as Activision Blizzard, Electronic Arts, and Take-Two Interactive
  • Social media companies such as Snap, Twitter, Facebook, and Google (which owns YouTube)

The largest ETF dedicated to the communication services sector is the Vanguard Communication Services ETF ($VOX), which makes it an ideal way to gain exposure to the sector. You can read more about the holdings in $VOX here.

See Top Advertising and Marketing Stocks by Market Cap.

Information technology stocks

Information technology (sometimes just referred to as “technology”) encompasses the business of technology, both software and hardware. Some of the largest information technology companies include:

  • “Big Tech” companies, which produce software and hardware products, such as Apple and Microsoft
  • Semiconductors & hardware companies such as NVIDIA, Intel, QUALCOMM, and Advanced Micro Devices
  • Software companies such as Adobe, Zoom, salesforce.com, Accenture, and Intuit
  • Cybersecurity and cloud computing players like Crowdstrike, Cisco Systems, Cloudflare, MongoDB
  • Financial technology companies and card networks like Visa, Mastercard, PayPal, Square, and Fiserv

Don’t miss the Top Big Tech Stocks by Market Cap.

The largest ETF dedicated to information technology is the Vanguard Information Technology ETF ($VGT). However, it is closely trailed by the Technology Select Sector SPDR Fund ($XLK). The two ETFs share 85% of their weight in common, which means that barring some differences in weighting, these two ETFs are remarkably similar. You can access info on the portfolios of $VGT and $XLK here.

Healthcare stocks

The far-reaching sector of healthcare covers pharmaceutical, biotech, life science, and healthcare equipment and service companies. Some of the most recognizable healthcare companies include:

  • Healthcare providers and services such as UnitedHealth Group, Cigna, Humana, and Anthem
  • Pharmaceutical & biotech companies such as Johnson & Johnson, Pfizer Inc., Merck & Co., and Eli Lilly
  • Healthcare equipment providers such as Abbott Laboratories, Thermo Fisher Scientific, Danaher Corporation, and Medtronic
  • Genetic testing & diagnostics companies such as Illumina, Hologic, and Quest Diagnostics
  • Companies such as CVS Health Corp., which overlap with one or more segments of the healthcare, retail, and pharmacy business

What are the Top Biotech Stocks by Market Cap? 

The largest healthcare ETF is The Health Care Select Sector SPDR Fund ($XLV). It holds 64 holdings as of July 2021, which are mostly established players in the healthcare space. You can access information on $XLV here.

To find less established up-and-coming biotech or pharmaceuticals companies, you might have to look to smaller, niche ETFs like the ARK Genomic Revolution Fund ($ARKG) or iShares Biotechnology ETF ($IBB).

Consumer discretionary stocks

There are two similarly-named sectors that rely heavily on consumer spending. Consumer discretionary is the one that leans on consumers to have “discretionary income.” In other words, extra money to spend on things outside of basic necessities–like vacations, shopping, clothes, and leisure products. Here are some names you might recognize:

  • E-commerce & retail players such as Target, Amazon, and Home Depot.
  • Auto companies such as Tesla and Ford
  • Restaurants and food chains such as McDonald’s and Starbucks
  • Leisure and travel companies such as Booking Holdings, Southwest Airlines, and Avis Budget Group
  • Fashion brands such as L Brands, American Eagle, and Express

We all know Tesla is the most valuable company by market cap, but what are the other largest companies by market cap?

During periods when employment is high and people are flush with income to spend, consumer discretionary has great propensity to outperform the broader market. This is something we cover in our upcoming article on the business cycle, which also talks about the difference between consumer staples and consumer discretionary.

The largest consumer discretionary ETF is The Consumer Discretionary Select Sector SPDR Fund ($XLY). You can read about $XLY here.

Consumer staples stocks

Consumer staples is a sector that still depends on consumer spending, but is more strategically positioned to tackle difficult market conditions.

Some people will refer to consumer staples as consumer defensive. It includes food and beverage companies, household and personal product industries, “staples retailing,” and tobacco companies. This means that consumer staples generally includes highly-diversified wholesalers and product producers. You probably know more than a few of them, too:

  • Household staples companies such as Procter & Gamble Company, Mondelez International, Kraft Heinz, Tyson Foods, and Monster Beverage
  • Wholesalers such as Costco, Walgreens, Kroger, and Walmart
  • Food and drink companies such as Coca-Cola and PepsiCo
  • Beauty and wellness brands such as Estee Lauder and Colgate-Palmolive Company

The largest consumer staples ETF is The Consumer Staples Select Sector SPDR Fund ($XLP). However, it holds just 32 holdings as of July 2021. If people are looking for more coverage, they can look at the Vanguard Consumer Staples ETF ($VDC), which covers the same sector and has over 100 holdings.

Financials stocks

It might not surprise you to know that a sector called “financials” is dedicated to companies interfacing with the entire business of finance. For the most part, that refers to banks and lenders. However, it doesn’t necessarily stop there.

See Top Bank Stocks by Market Cap.

It includes:

  • Consumer & investment banking companies such as Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo
  • Stock exchanges and markets such as Nasdaq, CME Group, Intercontinental Exchange, and Cboe Global Markets
  • Indexers and ETF issuers such as State Street Corp., BlackRock, Invesco, MSCI
  • Consumer finance companies such as American Express, Discover, and Capital One
  • Insurance companies such as Aflac, Allstate, and Progressive

And, that just scratches the surface. Ultimately, finance is a big space with lots of overlap with niche sectors. With over $41 billion in assets under management as of July 2021, there’s no question that the Financial Select Sector SPDR Fund ($XLF) is the leader for exposure to financials.

Real estate stocks

If there’s any sector that attracts the greatest number of charlatans, it’s the real estate sector. You’ve no-doubt heard pitches from aspirational 20-somethings telling you that you can “own your destiny” by investing in real estate directly, renting out rooms in your house or in an investment property for profits. The only problem? It’s really hard. That’s where real estate stocks come in.

Don’t miss the Top Real Estate Stocks by Market Cap.

Real estate as a sector is relatively different from all the others, which is why we plan to dedicate an entire separate upcoming blog post to this sector (sign up for our newsletter and never miss our best posts, plus top market news of the week).

However, real estate as a sector is generally tracked by Real Estate Investment Trusts (REITs). REITs are companies that own or finance real estate projects across a large variety of sectors: healthcare, hotels & resorts, offices, retail, specialized, and residential. A small figure is still expended in real estate servicers and diversified real estate companies.

That said, real estate is unlike other sectors because of this relatively direct organizational structure. In short, since real estate companies own the products, their value is assessed in their success selling the product (occupancy).

The largest U.S-based real estate fund is the Vanguard Real Estate ETF ($VNQ), which you can read up on here. It invests in dozens of real estate investment trusts (REITs). 

Industrials stocks

You might rightly assess that industrials and materials are sectors that have something to do with producing products. It might be a bit confusing at first glance, but there’s one really easy way to distinguish the two: materials come first, industrials make goods from materials and resources.

Odds are you might know a few of these players because of the products they build and supply:

  • Machinery companies like Caterpillar, General Electric Company, and Deere & Company
  • Aerospace and defense companies such as Boeing, Airbus, Lockheed Martin, and Raytheon Technologies
  • Air and freight players like FedEx and United Parcel Service (UPS)
  • Road and rail companies like Union Pacific and CSX Corp.
  • Airlines such as Southwest, American, and Alaska Air
  • Commercial services & supplies companies like Cintas Corp., Republic Services, and Waste Management
  • Professional services companies such as Equifax, Nielsen Holdings, and IHS Markit

Industrials is a vast sector with many facets, which is not unlike several other sectors you’ve already read about. The largest ETF dedicated to the industrial sector is The Industrial Select Sector SPDR Fund ($XLI). You can read up on its constituents and the finer details here.

What’s the top airline stock by Market Cap?

Materials stocks

As we said in the industrials category, you might already be acutely aware of some of the companies building and providing your products and services. However, it’s probably fair to assume you’re not as aware of the companies collecting the materials which bring about the creation of those goods and services. The materials category is dedicated to companies that interface with chemicals, construction, metals, and the like. This includes:

  • Chemicals companies such as Albermarle, Dow Inc., Ecolab, and Sherwin-Williams
  • Containers & packaging companies like Amcor PLC, Westrock, and Packaging Corp. of America
  • Metals & mining companies such as Nucor Corp. and Newmont Corp

See the Top Chemical Stocks by Market Cap.

Since the materials industry is so large and all-encompassing, there are dozens of material-centric ETFs that specifically invest in the categories. This is not unlike the other categories, but in the world of materials, you might find that ETF options are more granular. Take, for example, the VanEck Vectors Gold Miners ETF, VanEck Vectors Rare Earth/Strategic Metals ETF, Global X Copper Miners ETF, and SPDR S&P Metals & Mining ETF to see how granular materials can get. 

However, if you’re looking for a broad-base materials strategy, you might look at the Materials Select Sector SPDR Fund ($XLB) or Vanguard Materials ETF ($VAW) to get broad exposure to all that materials has to offer.

Energy stocks

  • When you think of energy, you might think of a large variety of things: electricity, gas, heating, and the like. Many might be surprised to know that quite a few energy sector ETFs track a narrow subsection of the “energy companies” out there today. 

Top Oil and Gas Stocks by Market Cap in 2022.

In that sense, the energy sector is pretty straightforward:

  • Oil and gas companies like Chevron, Exxon Mobil Corp, Marathon Oil Corp., Phillips 66, and Valero Energy Corp.
  • Energy equipment and services companies such as Haliburton, Schlumberger, and Baker Hughes

However, that comes with a big asterisk: though the largest energy ETFs focus on oil and gas, there are an increasing number that are investing in clean energy.

The Energy Select Sector SPDR Fund ($XLE) and Vanguard Energy ETF ($VDE) tell one story about our energy, but the iShares Global Clean Energy ETF ($ICLN) is just one example of the counter-narrative. It speaks to the increased demand for clean energy, already becoming the second-largest energy sector ETF.

So, though the energy sector is not fully reformed and focusing on the future, that might be okay in the near-term. But, those are considerations to take into account when looking at these stocks.

Utilities stocks

Some of the companies you might have expected to see in the energy sector have cozied up in the utilities sector. It’s also a place where a handful of renewables companies you might have expected to see in the energy sector have made their presence known.

When you think about it, it makes sense. Whereas energy companies are focused on the actual production of energy products, it’s the utility sector that ultimately keeps your lights on. Here are a few companies to take a look at:

  • Electric utilities like Duke Energy, NextEra Energy, and Edison International
  • Water utilities such as American Water Works
  • Gas utilities such as Atmos Energy
  • Multi-faceted utility companies such as Ameren Corp., Dominion Energy, and Sempra Energy

The largest utilities ETF is the Utilities Select Sector SPDR Fund ($XLU). 

What can sectors tell us about the markets?

Ultimately, utilities are one way of understanding certain cross-sections of the market. However, sectors are just one kind of cross-section; and, the way you draw your cross-sections and weight them can drastically change perceptions about the performance of a market. 

For that, we might have to defer you to a couple of our other articles:

  • America’s biggest indexes: We explain some of the finer points of indexes and how these “hypothetical portfolios” can be organized.
  • Timing the market: In our upcoming article about the business cycle, we dive into how these sectors can help investors understand where the market is.

Familiarizing yourself with market sectors is a good way to self-educate on a diversified set of investment opportunities. Investing in the stock market is about more than just individual stocks, which is why things like indexes, ETFs, and sectors are good ways to expand your coverage.

There’s still a plethora of information to sift through, though, so if you want to take this one step farther and learn from what other investors are doing, check out the new Front app–featuring an entire community of investors talking 24/7 about markets, stocks, crypto, strategies, and more.

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