What Are the Sectors and Industries of the S&P 500 explained by professional Forex trading experts the “ForexSQ” FX trading team.
What Are the Sectors and Industries of the S&P 500?
One of the most important concepts new investors in the stock market need to learn has to do with sectors and industries. I want to take a few moments to walk you through the definition of these concepts, explain what they are in practical terms, and show you how they fit into one of America’s largest stock market indices, the S&P 500. Though it will only take a brief amount of your time, you’ll be glad you learned the difference once and for all.
What Is the Difference Between a Sector and an Industry?
The general economy and stock market are organized into two tiers. The highest tier, a sector, is a broad grouping of companies that have similar economic characteristics. There are currently 10 major sectors that most investors use when breaking down the corporations and other issuers of securities such as stocks, bonds, REIT units, etc.
Sectors, in turn, are broken down into sub-categories known as industries. This allows a closer grouping of similar businesses. For example, both Wal-Mart Stores, the discount retail chain focusing on its core customer of poor and working class families, and Tiffany & Company, the luxury jeweler specializing in everything from gold cufflinks to seven-figure one-of-a-kind masterpieces, are included in the consumer discretionary sector. However, they are sorted into different industries.
What Are the Advantages of Paying Attention to Sectors and Industries?
There are several advantages to watching sectors and industries.
Firstly, you can rotate through both looking for investment ideas for your long-term portfolio, requesting annual reports and Form 10-K filings to compare one business to its closest competitors.
Secondly, you can pay attention to the overall valuation applies to a given industry over time. By way of illustration, it has historically been a very bad thing for civilization when the financial sector becomes too large compared to the other sectors because it represents an increase in rent-seeking activities; that is, individuals who produce little to nothing of value and, rather than provide capital to enterprises in the form of IPOs or loans to businesses to expand and give people the goods and services they desire, extract a toll for merely moving money around in a digital ledger.
This can be particularly insightful for those who take a valuation-based approach to portfolio construction.
Thirdly, you can become familiar with the economics of the various businesses in certain industries. This can allow you to anticipate potentially intelligent things to do. For example, if you believe that energy prices are going to decline, you might find transportation stocks appealing, even if the higher profits haven’t shown up on their income statement, yet, because you believe one of the biggest cost inputs – gasoline and jet fuel – is about to plummet. When combined with disciplined, long-term, tax-efficient, low-turnover, highly passive investing, and restricted to a chance to get your hands on truly excellent businesses, it can be a ticket to building wealth.
Fourthly, by using sector- or industry-specific exchange traded funds, smaller investors can often buy a diversified basket of an entire grouping with little to no commission and expense ratios that are typically less than 0.50% to 1.00% per annum.
For now, let’s dive into the sector and industry breakdown of the United States stock market as a whole. I’m going to use the S&P 500 index as a proxy for the stock market despite my serious reservations about recent methodology changes that have quickly been put in place.
As of the most recent stock market close on February 26th, 2016, the total value of all stocks in the S&P 500 index came to $17.87 trillion.
Consumer Discretionary Sector of the S&P 500
The consumer discretionary sector consists of businesses that have demand which rises and falls based on general economic conditions such as washers and dryers, sporting goods, new cars, and diamond engagement rings. At present, the consumer discretionary sector contains twelve industries.
- Automobile Components Industry
- Automobiles Industry
- Distributors Industry
- Diversified Consumer Services Industry
- Hotels, Restaurants & Leisure Industry
- Household Durables Industry
- Internet & Catalog Retail Industry
- Leisure Products Industry
- Media Industry
- Multiline Retail Industry
- Specialty Retail Industry
- Textile, Apparel & Luxury Goods Industry
As of February 26th, 2016, the total value of all consumer discretionary stocks in the United States came to $4.18 trillion.
Consumer Staples Sector of the S&P 500
The consumer staples sector consists of businesses that sell the necessities of life, ranging from bleach and laundry detergent to toothpaste and packaged food. At present, the consumer staples sector contains six industries.
- Beverages Industry
- Food & Staples Retailing Industry
- Food Products Industry
- Household Products Industry
- Personal Products Industry
- Tobacco Industry
As of February 26th, 2016, the total value of all consumer staples stocks in the United States came to $3.46 trillion. This is a particularly interesting sector because it is one of the few that disproportionately produces rich shareholders over long periods of time.
Energy Sector of the S&P 500
The energy sector consists of businesses that source, drill, extract, and refine the raw commodities we need to keep the country going, such as oil and gas. At present, the energy sector contains two industries.
- Energy Equipment & Services Industry
- Oil, Gas & Consumable Fuels Industry
As of February 26th, 2016, the total value of all energy stocks in the United States came to $2.52 trillion. This is considerably smaller than it was only a year or two ago because, as I pen this, energy prices have collapsed and shares of the oil majors have tanked.
Financials Sector of the S&P 500
The financial sector consists of banks, insurance companies, real estate investment trusts, credit card issuers, and a host of other money-centric enterprises that keep the debits and credits of the economy flowing. At present, the financial sector contains eight industries.
- Banking Industry
- Capital Markets Industry
- Consumer Finance Industry
- Diversified Financial Services Industry
- Insurance Industry
- Real Estate Investment Trusts (REITs) Industry
- Real Estate Management & Development Industry
- Thrifts & Mortgage Finance Industry
As of February 26th, 2016, the total value of all financial stocks in the United States came to $5.91 trillion.
Health Care Sector of the S&P 500
The health care sector consists of drug companies, medical supply companies, and other scientific-based operations that are concerned with improving and healing human life. At present, the health care sector contains six industries.
- Biotechnology Industry
- Health Care Equipment & Supplies Industry
- Health Care Providers & Services Industry
- Health Care Technology Industry
- Life Sciences Tools & Services Industry
- Pharmaceuticals Industry
As of February 26th, 2016, the total value of all health care stocks in the United States came to $4.17 trillion.
Industrials Sector of the S&P 500
From railroads and airlines to military weapons and industrial conglomerates, the industrial sector makes it possible for modern civilization to exist. At present, the industrial sector contains fourteen industries.
- Aerospace & Defense Industry
- Air Freight & Logistics Industry
- Airlines Industry
- Building Products Industry
- Commercial Services & Supplies Industry
- Construction & Engineering Industry
- Electrical Equipment Industry
- Industrial Conglomerates Industry
- Machinery Industry
- Marine Industry
- Professional Services Industry
- Road & Rail Industry
- Trading Companies & Distributors Industry
- Transportation Infrastructure Industry
As of February 26th, 2016, the total value of all industrial stocks in the United States came to $2.94 trillion.
Information Technology Sector of the S&P 500
The Information Technology, or IT, sector is home to the hardware, software, computer equipment, and IT services operations that make it possible for you to be reading this right now. From microprocessors to printers, operating systems to cell phone handsets, recent advances in technology have turned IT into a giant part of the domestic and global economies. At present, the information technology sector contains eight industries.
- Communications Equipment Industry
- Electronic Equipment, Instruments & Components Industry
- IT Services Industry
- Internet Software & Services Industry
- Semiconductors & Semiconductor Equipment Industry
- Software Industry
- Technology Hardware, Storage & Peripherals Industry
As of February 26th, 2016, the total value of all information technology stocks in the United States came to $5.28 trillion.
Materials Sector of the S&P 500
The building blocks that supply the other sectors with the raw materials it needs to conduct business, the material sector manufacturers, logs, and mines everything from precious metals, paper, and chemicals to shipping containers, wood pulp, and industrial ore. At present, the material sector contains five industries.
- Chemicals Industry
- Construction Materials Industry
- Containers & Packaging Industry
- Metals & Mining Industry
- Paper & Forest Products Industry
As of February 26th, 2016, the total value of all materials stocks in the United States came to $1.28 trillion.
Telecommunication Services Sector of the S&P 500
From telephone access to high speed internet, the telecommunication services sector of the economy keeps us all connected. At present, the telecommunication services sector is made up of two industries:
- Diversified Telecommunication Services
- Wireless Telecommunication Services
As of February 26th, 2016, the total value of all telecommunication services stocks in the United States came to $1.70 trillion.
Utilities Sector of the S&P 500
The utilities sector of the economy is home to the firms that make our lights work when we flip the switch, let our stoves erupt in flame when we want to cook food, make water come out of the tap when we are thirsty, and more. At present, the utilities sector is made up of five industries.
- Electric Utilities Industry
- Gas Utilities Industry
- Independent Power and Renewable Electricity Producers Industry
- Multi-Utilities Industry
- Water Utilities Industry
As of February 26th, 2016, the total value of all utilities stocks in the United States came to $1.12 trillion.
What Are the Sectors and Industries of the S&P 500 Conclusion
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