You've probably heard of stock market sectors, but do you know what they are? Stock sectors are split into categories that consist of companies that operate in different areas of business. There are 11 stock market sectors that make up the entire stock market, according to the Global Industry Classification Standard.
The performance of these sectors varies depending on the nature of the economy. This is why it can be beneficial to have investment exposure to each sector at one point or another while you invest: so you can be covered no matter what.
There are several macroeconomic factors that are influencing the economy and corporate profits. "The war in Ukraine, lockdowns in China, supply chain disruptions and the risk of stagflation are hammering growth," David Malpass, president of the World Bank, says in a recent news release by the international financial institution.
While one sector may be performing poorly as a result of bad economic conditions, others may be thriving. That's why it's important to know each stock market sector and the factors that influence their performance, so you know how to position your investment portfolio as the cyclical market evolves. Here's a rundown of all 11 sectors, star companies, five-year performance as of June 16 and a popular sector ETF for each.
Materials
A company with a core business that involves taking raw materials or natural resources and converting that into something more useful is almost always labeled a materials stock. Many chemical companies, mining companies, metals businesses and logging companies are in the materials sector, as are some oil and natural gas stocks. The performance of the materials sector is often influenced by inflation and changes in the U.S. dollar.
The materials sector tends to do well when the economy is growing and when there is high demand for industrial metals. As a result of supply constraints amid Russia's war with Ukraine, commodity and chemical prices are inflated, which is a positive for the sector, but in a similar light, supply chain challenges could stifle sector growth.
Major 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)
Industrials
Industrial sector stocks tend to either be involved directly in the production of capital goods like aircraft, electrical equipment, industrial machinery and the like, or in the provision of transportation services and infrastructure. Many of America's most iconic blue-chip companies hail from the industrial sector, with many also playing a historical role in the evolution of U.S. society and American military might. Industrials has a market capitalization of about $4.5 trillion as of mid-June 2022.
Major 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 Select Sector SPDR ETF (XLI)
Financials
There has probably never been so stark and empirical a rebuttal to the glib aphorism "All press is good press" than financial sector stocks in the midst of the Great Recession. Banks were failing left and right, with many small- or mid-cap names going bankrupt or being 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 much more gargantuan than they were in the financial crisis. The financials sector is one of the beneficiaries of rising interest rates, but with many investors turning to cash in times of economic uncertainty, lower loan demand could weigh on the sector's earnings potential.
Major examples: Bank of America Corp. (BAC), Visa Inc. (V), PayPal Holdings Inc. (PYPL), Berkshire Hathaway Inc. (BRK.A, BRK.B)
Five-year S&P 500 sector performance: +26.4%
Largest financial sector ETF: Financial Select Sector SPDR ETF (XLF)
Energy
Businesses that provide the services and equipment allowing companies to extract sources of energy from the earth are considered a part of this sector, as are most of the companies that do the exploration, production, refining and marketing of fossil fuels like oil, natural gas and coal. Oilfield services companies are considered energy stocks, even if they just help locate a reservoir for a larger company or if they sell the equipment, fluids and materials necessary for horizontal fracturing, known as fracking. The energy sector has been a recent outperformer in the stock market as oil prices have soared, but over the long run, energy has been one of the least impressive sector performers. Given the uncertainty around the price of oil, there may be volatility in this sector in the short term.
Major 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)
Consumer Discretionary
Sometimes a name can say it all. Consumer discretionary is one of the more aptly named stock sectors: Companies within it market their products and services to consumers, not businesses, and what they sell is generally bought with discretionary income. Some industries the sector encompasses are automobiles, apparel, hotels, restaurants, leisure-related businesses and luxury goods, to name a few. As we approach 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.
Major examples: Carnival Corp. (CCL), Lululemon Athletica Inc. (LULU), Party City Holdco Inc. (PRTY)
Five-year S&P 500 sector performance: +46.6%
Largest consumer discretionary sector ETF: Consumer Discretionary Select Sector SPDR ETF (XLY)
Information Technology
Arguably the premier stock market sector of the 21st century, information technology contains pretty much all the essential industries to today's internet-powered, device-driven world. Broadly 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 sector has potential for future growth in areas of artificial intelligence, the Internet of Things, cloud-based products and the metaverse. The information technology sector has a market cap of more than $11 trillion as of mid-June 2022 even after a prolonged slump.
Major 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 sector ETF: Technology Select Sector SPDR ETF (XLK)
Communication Services
One of the newer stock market sectors is communication services, which was formerly known as the telecom sector and was redefined in fall 2018. Decades of mergers and consolidation in the arena had made telecom an ultra-concentrated and practically irrelevant sector in terms of market cap, and something else was happening: Efficient data transmission became increasingly important, and a torrential stream of popular new content that attracted billions of eyeballs demanded smooth and reliable distribution. Today, the communication services sector loosely refers to companies that offer such services (like traditional telecoms) and media and entertainment companies that facilitate communication but also have their own content.
Major 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 communication services sector ETF: Communication Services Select Sector SPDR ETF (XLC)
Health Care
Both on Wall Street and Main Street, health care is another sector that's been growing faster than the wider economy, accounting for an ever-larger percentage of Americans' expenses (and portfolios). You've got two broad sides of health care when it comes to its classification in the stock market: the medical device manufacturers, medical services providers and telehealth on one hand, and the actual biotech and pharmaceutical products – the drugs themselves – on the other. The outlook for the health care sector is positive. As the population ages, many companies in this sector are innovating their products and services to come up with better treatments, which can translate to higher profits in the long term.
Major examples: Johnson & Johnson (JNJ), Pfizer Inc. (PFE), McKesson Corp. (MCK), Abbott Laboratories (ABT)
Five-year S&P 500 sector performance: +55.2%
Largest health care sector ETF: Health Care Select Sector SPDR ETF (XLV)
Consumer Staples
Without the fruits of this sector, the human species as we know it would essentially go extinct. You always need food, toilet paper, laundry detergent, shampoo, toothpaste and the like. The consumer staples sector can hold its own or even advance during a recession but usually trails the market in expansions. Lately, inflation has been a real problem for investors. In times of economic uncertainty, it's popular to hold on to companies that are under the consumer staples category, which is why it is labeled as a defensive sector.
Major 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 staples sector: Consumer Staples Select Sector SPDR ETF (XLP)
Utilities
Utilities provide fundamentally necessary services like water, gas and electricity to local communities and often wider regions. There are very high barriers to entry because of the capital-intensive and geographically limiting nature of their business, often making these companies natural monopolies. For this reason, they're highly regulated and their profitability is held in check by the government. The utilities sector is known for providing consistent returns, and like consumer staples is a defensive sector. But when the economy is expanding, the sector could underperform. Investors can also rely on utilities for their dividend income.
Major 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 sector ETF (by AUM; with expense ratio under 0.10%): Utilities Select Sector SPDR ETF (XLU)
Real Estate
One of the fastest-growing parts of the market in recent decades has been real estate, embodied most clearly by the rise of the real estate investment trust. A REIT is a tax-advantaged investment vehicle that can give retail investors a convenient way to gain easy exposure to the cash flows that come with real estate ownership, but without the massive capital outlay required. All REITs except mortgage REITs are contained in this sector; mortgage REITs are found in the financial sector. Also, real estate development companies and management companies fall under this umbrella.
Major examples: Redfin Corp. (RDFN), American Tower Corp. (AMT), Simon Property Group Inc. (SPG), Public Storage (PSA)
Five-year S&P 500 sector performance: +20.2%
Largest real estate sector ETF: Vanguard Real Estate ETF (VNQ)
