How to Rank and Diversify Your Investment Portfolio – Forbes Advisor


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Stock sectors classify the economy into easy-to-understand groups. Not only do they help viewers understand the general trajectories of certain sectors of the economy, but they are also invaluable in broadly diversifying your investments. By choosing stocks and funds from different sectors, you limit your investment risk and set the stage for solid growth.

What are stock market sectors?

Equity sectors are groups of public companies that have a lot in common, such as when they share similar business models and are active in related sectors. Stock market sectors can be further subdivided into smaller categories and can span multiple industries.

Global Industrial Classification Standard (GICS) is the main system for classifying stock market sectors and divides market industries into 11 sectors, with 24 industry groups, 69 industries and 158 sub-industries. These 11 sectors are not static, they can and do change. For example, the real estate sector was added to the list in 2016, signifying the growing profile of the residential and commercial real estate industry.

“Sectors are a more diverse way for an investor to target opportunities where they want a lot of exposure,” says Kyle Hart, founder of Coastal Wealth Planners, an investment advisory firm based in Manahawkin, NJ. “For investors, the sector approach avoids the risk of targeting a sole proprietorship” while positioning itself for growth in a larger sector.

The 11 stock market sectors of the GICS

The energy sector

The energy sector includes stocks involved in the extraction, refining and transportation of fossil fuels. These may be companies engaged in the exploration, production, refining and marketing of petroleum and natural gas, such as petroleum service companies, fuel pipeline and storage companies, and companies involved. in coal mining. Oddly enough, the sector does not include most renewable energy companies, which are generally considered to be utilities or industrialists.

  • Example of a sector fund: Vanguard Energy ETF (VDE)
  • Examples of sectoral actions: Suncor (SU), ExxonMobil (XOM), Peabody Energy (BTU)

The materials sector

The main activity of companies grouped in the materials sector is the extraction or processing of raw materials or the production of materials for manufacturing. Materials inventories include mining companies, chemical processors, building supply companies, and companies that produce or refine metals such as steel or copper.

  • Example of a sector fund: IShares Global Materials ETF (MXI)
  • Examples of sectoral actions: International paper (IP), DowDuPont (DWDP), Vale (VALE)

The industrial sector

The industrial sector encompasses a very wide range of businesses that manufacture capital goods, build infrastructure and provide transport services. Industrial sector stocks include companies that build capital goods such as airplanes, electrical equipment, industrial machinery and defense equipment; airlines, railways and logistics; and the large engineering companies that build roads, bridges and ports.

  • Example of a sector fund: IShares US Industrials ETF (IYJ)
  • Examples of sectoral actions: General Electric (GE), 3M (MMM), Lockheed Martin (LMT)

The consumer discretionary sector

Consumer discretionary businesses are businesses that depend primarily on consumer demand. The term discretionary is essential here because it tells you that these companies sell goods that people buy with their disposable income, rather than daily necessities. This sector covers a very wide range of brick and mortar and e-commerce businesses, including apparel, luxury goods, automotive, hospitality and catering, and various travel related businesses.

  • Example of a sector fund: Vanguard Consumer Discretionary ETF (Video recorder)
  • Examples of sectoral actions: Nike (NKE), Starbucks (SBUX)

The consumer staples sector

The consumer staples sector provides all the basic necessities of life, from food and drink to soap and toothpaste. It also includes tobacco and alcohol producers. The sector includes companies that produce these goods as well as those that sell them.

  • Example of a sector fund: Consumer Staples Select Sector SPDR Fund (XLP).
  • Examples of sectoral actions: Costco (COST), Walmart (WMT), Procter & Gamble (PG)

The healthcare sector

Stocks in the health care sector can be classified into two broad groups: companies that develop and manufacture pharmaceutical products and those that provide health care services or manufacture the products used to provide health care. On the pharmaceutical side, you will find companies that research and develop drugs as well as companies that support them. On the health services side, there are hospitals, manufacturers of medical equipment and health insurance companies. Cannabis stocks are also generally included in the healthcare sector.

  • Example of a sector fund: Vanguard Healthcare ETFs (VHT)
  • Examples of sectoral actions: Pfizer (PFE), UnitedHealth Group (UNH), CVS Health Corp. (CVS)

The financial sector

The finance industry is perhaps the simplest of the lot: if your main activity is money, then you are in finance. Banks, brokerage firms and insurance companies make up the bulk of the industry.

  • Example of a sector fund: SPDR fund for the selected financial sector (XLF)
  • Examples of sectoral actions: Bank of America (BAC), Goldman Sachs (GS), MetLife (MET)

The information technology sector

The information technology industry can be broadly divided into two parts: software and hardware. Businesses that manufacture semiconductors, computer and server components, and other types of computer hardware are at the heart of the industry. Then there are software developers and service providers, from database giants to corporate software titans. Finally, more and more Internet companies dominate the sector, although there are a good number of Internet companies which find themselves classified in other sectors because of their activities – Amazon, for example, is a stock of consumer discretionary.

  • Example of a sector fund: Vanguard Information Technology ETF (VGT)
  • Examples of sectoral actions: Oracle (ORCL), Microsoft (MSFT), IBM (IBM)

The communication services sector

The communications services sector was previously known as the telecommunications sector. That represents a part of its membership: telecommunications, including wireless networks and other old-fashioned landline service providers. The fastest growing part of the industry includes media and entertainment companies, including the old radio and television companies as well as the interactive media and internet entertainment companies that are slowly replacing them.

  • Example of a sector fund: SPDR Fund for Selected Sector of Communication Services (XLC)
  • Examples of sectoral actions: Verizon (VZ), AT&T (T), ViacomCBS (VIAC)

The utility sector

Like financial services, the utilities sector is another straightforward proposition: it is made up of utility companies, such as those that generate and distribute electricity, provide natural gas to homes and businesses, and own and operate businesses. water resources. Whichever business you look at, there are usually very high barriers to entry into the utility industry given their incredibly capital intensive needs, and many utilities are highly regulated monopolies in the area. geographic area in which they operate. This makes them low risk, low volatility investments that can provide predictable and stable returns over long periods of time.

  • Example of a sector fund: Utilities Select Sector SPDR Fund (XLU)
  • Examples of sectoral actions: Exelon, (EXC), American Water Works (AWK), NextEra Energy (NEE)

The real estate sector

The real estate sector includes companies that develop and manage large real estate projects as well as most real estate investment trusts (REITs), with the exception of mortgage REITs, which are included in the financial sector.

  • Example of a sector fund: Vanguard Real Estate Index Fund (VNQ)
  • Examples of sectoral actions: American Tower (AMT), Public Storage (PSA) and Digital Realty Trust (DRT)

Stock sectors and your portfolio

How should ordinary investors take advantage of sector stocks to broaden their own investment portfolio opportunities? Experts advise using as many GICS sectors as possible and spreading assets to diversify their holdings and help protect their investments from risk.

“A diversified portfolio must first have the appropriate dispersion across asset classes (ie stocks, bonds and cash) as a basis,” Hart said. “Sectors are becoming extremely important in securing diversified exposure within the equity asset class.”

For example, two investors can both have 60% stocks and 40% bonds as an allocation, but investor A can have all of their exposure to stocks in tech or real estate while investor B has an allocation. exposure in the 11 stock market sectors.

In this scenario, investor A would have an extremely different outcome in times of major market crisis such as the dotcom crash of 1999-2000 or the real estate bubble of 2007-2008.

“Diversified sector exposure ensures that directly correlated events like the tech market crash or the real estate bubble don’t derail a portfolio,” Hart said.

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