You’ve probably heard of stock market sectors, but do you know what they are? Stock sectors are broken down into categories made up of companies engaged in different lines of business. According to the Global Industry Classification Standard, there are 11 stock market sectors that make up the entire stock market.
The performance of these sectors varies depending on the type of economy. For this reason, it can be beneficial to have investment exposure to each sector at some point while investing: this way you are always covered.
There are several macroeconomic factors affecting the economy and corporate earnings. “The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hurting growth,” said David Malpass, President of the World Bank, in a recent press release from the international financial institution.
While one sector may underperform due to poor economic conditions, others may thrive. For this reason, it is important to know each stock market sector and the factors that influence its performance so that you know how to position your investment portfolio in line with cyclical market developments. Here’s a rundown of all 11 sectors, star companies, five-year performance as of June 16th, and a popular sector ETF for each.
A company with a core business of taking raw materials or natural resources and turning them into something more useful is almost always referred to as a materials store. Many chemical companies, mining companies, metals companies, and lumber companies are involved in the resource sector, as are some oil and natural gas stocks. The performance of the materials sector is often affected by inflation and changes in the US dollar.
The materials sector tends to do well when the economy is growing and there is high demand for base metals. Commodity and chemical prices are inflated as a result of supply constraints amid the war between Russia and Ukraine, which is positive for the sector, but similarly supply chain challenges could dampen sector growth.
Important examples: Rio Tinto Group (Ticker: RIO), Vale SA (VALE) and Ecolab Inc. (ECL)
Five-Year S&P 500 Sector Performance: +38.9%
Largest materials sector ETF: Materials Select Sector SPDR Fund (XLB)
Industrial sector stocks are typically either directly involved in the production of capital goods such as aircraft, electrical appliances, industrial machinery and the like, or in the provision of transportation services and infrastructure. Many of America’s most famous blue-chip companies come from the industrial sector, with many also playing historic roles in the development of US society and military power. Industrial stocks have a market cap of approximately $4.5 trillion as of mid-June 2022.
Important examples: Boeing Co. (BA), Lockheed Martin Corp. (LMT), General Electric Co. (GE), Caterpillar Inc. (CAT)
Five-Year S&P 500 Sector Performance: +23.1%
Largest industrial sector ETF: Industrial Selected Sector SPDR ETF (XLI)
Probably never has there been such a clear and empirical refutation of the superficial aphorism “all press is good press” as financial stocks in the midst of the Great Recession. Banks failed left and right, and many small- or mid-cap names went bankrupt or were bought out for pennies on the dollar. Even some of the biggest names on Wall Street – like Bear Stearns and Lehman Brothers – failed or were bailed out. More than a decade later, the largest banks are far more gigantic than they were during the financial crisis. The financial sector is one of the beneficiaries of rising interest rates, but with many investors turning to cash in times of economic uncertainty, reduced credit demand could weigh on the sector’s earnings potential.
Companies that provide services and equipment that enable companies to extract energy sources from the earth are considered part of this sector, as are most companies that explore, produce, refine and market fossil fuels such as oil, natural gas, etc. Coal . Oilfield service companies are considered energy stocks even if they’re just helping to locate a reservoir for a larger company, or if they’re selling the equipment, fluids and materials required for horizontal fracturing, also known as fracturing. The energy sector has been a stock market outperformer of late as oil prices have soared, but over the long term, energy has been one of the least impressive sector performers. Short-term volatility may occur in this sector given the uncertainty surrounding the price of oil.
Important examples: Exxon Mobil Corp. (XOM), Schlumberger Ltd. (SLB), Kinder Morgan Inc. (KMI), Halliburton Co. (HAL)
Five-Year S&P 500 Sector Performance: +22.4%
Largest energy sector ETF: Energy Select Sector SPDR ETF (XLE)
Sometimes a name can say everything. Consumer discretionary is one of the more aptly named stock sectors: companies market their products and services to consumers, not businesses, and what they sell is generally bought with discretionary income. Some industries that the sector encompasses are automobiles, apparel, hotels, restaurants, leisure businesses, and luxury goods, just to name a few. As we move closer to a post-pandemic world, there are several tailwinds for the consumer discretionary sector, such as the growth of e-commerce, renewed spending on travel, and the rapid rise of the electric vehicle.
Important examples: Carnival Corp. (CCL), Lululemon Athletica Inc. (LULU), Party City Holdco Inc. (PRTY)
Five-Year S&P 500 Sector Performance: +46.6%
Largest ETF for consumer discretionary: Consumer Discretionary Select Sector SPDR ETF (XLY)
Information technology is arguably the most important stock market sector of the 21st century, encompassing pretty much all of the essential industries for today’s internet-enabled, device-driven world. Roughly speaking, software, hardware and semiconductors are the three pillars of this sector. As the internet plays an increasingly important role in our everyday lives, the industry has potential for future growth in artificial intelligence, internet of things, cloud-based products and metaverse. The information technology sector has a market cap of more than $11 trillion as of mid-June 2022, even after a prolonged slump.
Important examples: Apple Inc. (AAPL), Cisco Systems Inc. (CSCO), Intel Corp. (INTC), Oracle Corp. (ORCL)
Five-Year S&P 500 Sector Performance: +127%
Largest information technology ETF: Technology Select Sector SPDR ETF (XLK)
One of the newer stock market sectors is the communications services, formerly known as the telecoms sector, which was redefined in the fall of 2018. Decades of mergers and consolidations in the arena had made telecoms a highly concentrated and virtually irrelevant sector in terms of market capitalization, and something else was happening: Efficient data transfer was becoming more important, and a torrent of popular new content, attracting billions of eyeballs, was demanding after a smooth and reliable distribution. Today, the communication services sector broadly refers to companies that provide such services (like traditional telecommunications) and media and entertainment companies that facilitate communication but also have their own content.
Important examples: Verizon Communications Inc. (VZ), Meta Platforms Inc. (META), Walt Disney Co. (DIS), Comcast Corp. (CMCSA)
Five-Year S&P 500 Sector Performance: +13%
Largest ETF for the communication services sector: Communication Services Select Sector SPDR ETF (XLC)
On both Wall Street and Main Street, healthcare is another sector that’s growing faster than the broader economy and accounting for a growing percentage of Americans’ spending (and portfolios). You have two broad sides of healthcare when it comes to stock market classification: the medical device manufacturers, medical service providers, and telemedicine on the one hand, and the actual biotech and pharmaceutical products — the drugs themselves — on the other. The outlook for the healthcare sector is positive. As the population ages, many companies in this sector are innovating their products and services to develop better treatments that can lead to higher profits in the long run.
Important examples: Johnson & Johnson (JNJ), Pfizer Inc. (PFE), McKesson Corp. (MCK), Abbott Laboratories (ABT)
Five-Year S&P 500 Sector Performance: +55.2%
Largest ETF for the healthcare sector: Health Care Select Sector SPDR ETF (XLV)
Without the fruits of this sector, the human species as we know it would virtually die out. You always need groceries, toilet paper, detergent, shampoo, toothpaste and the like. The consumer staples sector can hold up or even grow during a recession, but typically lags the market in expansions. Inflation has been a real concern for investors lately. In times of economic uncertainty, it’s popular to hold onto companies that fall into the consumer staples category, which is why they’re called the defensive sector.
Important examples: Coca-Cola Co. (KO), Colgate-Palmolive Co. (CL), Procter & Gamble Co. (PG), Walmart Inc. (WMT)
Five-Year S&P 500 Sector Performance: +22.4%
Largest consumer goods sector: Consumer Staples Select Sector SPDR ETF (XLP)
Utilities provide basic services such as water, gas and electricity to local communities and often to wider regions. Due to the capital-intensive and geographically limited nature of their business, there are very high barriers to entry, often making these companies natural monopolies. Because of this, they are heavily regulated and their profitability is kept in check by the government. The utilities sector is known for producing consistent returns and, like consumer staples, is a defensive sector. But if the economy expands, the sector could underperform. Investors can also rely on utilities for their dividend income.
Important examples: NextEra Energy Inc. (NEE), Duke Energy Corp. (DUK), Exelon Corp. (EXC), Dominion Energy Inc. (D)
Five-Year S&P 500 Sector Performance: +20.7%
Largest Utilities ETF (by AUM; with expense ratio below 0.10%): Utilities Select Sector SPDR ETF (XLU)
One of the fastest growing parts of the market in recent decades has been real estate, most typified by the rise of the Real Estate Investment Trust. A REIT is a tax-deferred investment vehicle that can offer retail investors a convenient way to easily participate in the cash flows that come with owning real estate, but without the massive capital outlay required. All REITs except mortgage REITs are included in this sector; Mortgage REITs can be found in the financial sector. Real estate development companies and management companies also fall under this umbrella.
Important examples: Redfin Corp. (RDFN), American Tower Corp. (AMT), Simon Property Group Inc. (SPG), Public Stock (PSA)
Five-Year S&P 500 Sector Performance: +20.2%
Largest real estate sector ETF: Vanguard Real Estate ETF (VNQ)