When constructing an investment portfolio, you might be drawn to specific market sectors that align with your investment goals or areas of interest. A market sector is essentially a segment of the stock market that represents a particular portion of the economy or industry, such as technology, healthcare, energy or finance. Understanding how these sectors operate and how they perform under different economic conditions can help you make more informed decisions when selecting individual stocks, mutual funds, exchange-traded funds (ETFs) and other investment vehicles. By familiarizing yourself with the distinct characteristics of each sector, you can tailor your investment approach to align with your financial objectives and risk tolerance.
A financial advisor can help you create a financial plan for your investment needs and goals.
Market Sectors Overview
In total, there are 11 sectors in the stock market, each with its own characteristics and features. Under each sector umbrella is a grouping of industries, which are represented by all the companies in that industry that trade on the stock market. Here’s an at-a-glance look at what the 11 market sectors are and the industries they represent:
Communication Services: 5 Industries
The industries in the communications services sector are as follows:
- Diversified telecommunication services
- Entertainment
- Interactive media and services
- Media
- Wireless telecommunication services
Some major companies in this sector are Netflix, Facebook and Disney.
Consumer Discretionary: 11 Industries
The industries in the consumer discretionary sector are:
- Auto components
- Automobiles
- Distributors
- Diversified consumer services
- Hotels, restaurants and leisure
- Household durables
- Internet and direct marketing retail
- Leisure products
- Multiline retail
- Specialty retail
- Textiles, apparel and luxury goods
Companies in this space include Home Depot, McDonald’s and Nike.
Consumer Staples: 6 Industries
The consumer staples industries are:
- Beverages
- Food and staples retailing
- Food products
- Household products
- Personal products
- Tobacco
If you’re looking to invest in consumer staples, some firms to consider include Campbell Soup Co., Kroger and Boston Beer Company.
Energy: 2 Industries
Energy industries include:
- Energy equipment and services
- Oil, gas and consumable fuels
Possible investments include Valvoline and Antero Midstream.
Financials: 7 Industries
The industries of the financial sectors are:
- Banks
- Capital markets
- Consumer finance
- Diversified financial services
- Insurance
- Mortgage REIT
- Thrifts and mortgage finance
Prominent companies in this sector include MetLife, PNC and PayPal.
Healthcare: 6 Industries
The industries of the healthcare sector are:
- Biotechnology
- Healthcare equipment and supplies
- Healthcare providers and services
- Healthcare technology
- Life sciences tools and services
- Pharmaceuticals
Big companies in this sector include CVS, Biogen and Moderna.
Industrials: 14 Industries
Industrials is the sector with the most industries. They are:
- Aerospace and defense
- Air freight and logistics
- Airlines
- Building products
- Commercial services and supplies
- Construction and engineering
- Electrical equipment
- Industrial conglomerates
- Machinery
- Marine
- Professional services
- Road and rail
- Trading companies and distributors
- Transportation infrastructure
Some of the many industrials companies you can invest in are Energizer Holdings, FedEx and Huntington Ingalls Industries.
Information Technology: 6 Industries
The following industries make up the information technology sector:
- Communications equipment
- Electronic equipment, instruments and components
- IT services
- Semiconductors and semiconductor equipment
- Software
- Technology hardware, storage and peripherals
Companies in the information technology sector include Xerox, Salesforce and DocuSign.
Materials: 5 Industries
The industries in the materials sector are:
- Chemicals
- Construction materials
- Containers and packaging
- Metals and mining
- Paper and forest products
If you’re looking for materials investments, consider Steel Dynamics, Eagle Materials and The Scotts Miracle-Gro Co.
Real Estate: 2 Industries
The two real estate industries are:
- Equity real estate investment trusts
- Real estate management and development
Some possible firms to invest in are Brookfield, Kimco and Equinix.
Utilities: 5 Industries
The utilities industries are:
- Electric utilities
- Gas utilities
- Independent power and renewable electricity producers
- Multi-utilities
- Water utilities
Companies to invest in within the utilities sectors are Sempra, PPL and American Water Works.
It’s worth noting that real estate is the newest sector to be added to the list. It wasn’t until 2016 that real estate was officially recognized as its own market sector. Previously, real estate investments had been grouped in with the financials sector on the S&P 500.
What Are the Biggest Market Sectors?
If you’re trying to determine the biggest market sector, you could start by looking at the number of industries each sector covers. In this regard, the industrials sector might appear to be the largest, as it encompasses a wide range of industries, while sectors like energy and real estate might seem smaller since they each include only two industries.
However, counting industries alone doesn’t give a complete picture of a sector’s true size. A more accurate way to measure a market sector’s size is by using market capitalization.
Market capitalization represents the total market value of all of a company’s outstanding shares of stock. When applied to stock market sectors, market capitalization is the sum of the total value of all companies across each industry within a given sector. This approach provides a more meaningful way to assess the relative size of different sectors.
It’s important to note that market capitalization is a dynamic figure, changing daily as stock prices fluctuate. The value of a sector can rise or fall based on the performance of individual companies within it. Despite these fluctuations, market capitalization offers a valuable metric for comparing sectors by their overall market value.
For example, the technology sector often ranks as one of the largest sectors by market capitalization, driven by the sheer size of companies like Apple, Microsoft and Amazon. On the other hand, smaller sectors, such as utilities or materials, may lag behind in total market value, even if they include several industries. Understanding these distinctions can help investors make informed decisions about sector-specific investments.
For example, here’s how market capitalization compared across all 11 sectors as of October 2024:
- Communication services – $6.37 trillion
- Consumer discretionary – $8.42 trillion
- Consumer staples – $5.04 trillion
- Energy – $3.83 trillion
- Financials – $12.24 trillion
- Healthcare – $8.66 trillion
- Industrials – $7.39 trillion
- Information technology – $20.25 trillion
- Materials – $2.60 trillion
- Real estate – $1.72 trillion
- Utilities – $1.93 trillion
Based on the numbers, it’s clear that information technology is the largest market sector based on market capitalization. This sector covers six industries, including software, technology, hardware, semiconductors and IT services. Its market capitalization is more than double that of the industrials sector, which has more than twice as many underlying industries.
Financials is another sector that rates as one of the largest, based on market capitalization. Under the financials umbrella, the biggest industry representation is banks, followed by capital markets and insurance. Healthcare, consumer discretionary and communication services round out the top list for the largest market sectors ranked by market capitalization.
Market Sector Performance
When deciding which market sectors to invest in, it’s important to look beyond size and consider how well one sector performs versus another. One way to measure this is in terms of how performance compares to the broader market as a whole. For example, you might compare one sector to the market using a benchmark like the S&P 500.
The key here is looking at the historical performance of one sector compared to the benchmark. So, for example, if you were to look at the 10-year of each sector compared to the S&P 500 for the period ending in October 2024, here’s how the numbers add up:
- Communication services: +99%
- Consumer discretionary: +198%
- Consumer staples: +87%
- Energy: +11%
- Financials: +156%
- Healthcare: +139%
- Industrials: +157%
- Information technology: +609%
- Materials: +156%
- Real estate: +12% (5-year return)
- Utilities: +86%
- S&P 500: +200%
If you’re trying to decide which sectors to invest in based on returns, then you might use sectors that outperformed the S&P as a baseline. So your list would include consumer discretionary, healthcare and information technology.
There are a couple of points to keep in mind, however, when investing by sector.
First, past history isn’t an indicator of future performance. So just because a market sector has done well up to now doesn’t necessarily guarantee that it will deliver the same or a higher level of returns in the future.
Second, market sectors can be affected differently by market volatility and where the economy is in the business cycle. Financials and real estate, for example, may do better in the early stages of the business cycle versus the later stages. In a recessionary environment, consumer staples, utility companies and healthcare may get a boost as consumers direct their spending toward basic living expenses and away from borrowing or discretionary spending.
How to Invest in Market Sectors
There are several ways to add targeted sector exposure to your investment portfolio. One approach is to select a specific sector and purchase individual stocks that represent key industries within that sector. For instance, you could focus on healthcare, technology or energy and buy stocks tied to companies within those industries.
Alternatively, you might opt for a sector mutual fund or exchange-traded fund (ETF) that offers broad exposure, such as a utility fund, tech fund or healthcare fund, allowing you to diversify within that sector without needing to select individual stocks.
When evaluating which sectors to invest in, consider factors like market capitalization, historical performance, and the overall risk profile of that sector. Assessing how a sector has performed over time can give you insight into its stability or growth potential.
However, risk should always be a critical consideration when reviewing returns. A sector that has high returns might also carry greater volatility, so it’s vital to understand how it aligns with your risk tolerance and investment objectives. Whether you’re chasing aggressive growth or seeking steady, long-term buy-and-hold options, your approach to sector investing will differ based on your goals.
In addition to fundamental analysis, keeping an eye on broader market trends and the overall economy is crucial. Sectors tend to perform differently during various phases of the business cycle. For instance, technology stocks may thrive during periods of expansion, while consumer staples might offer stability during downturns.
Bottom Line
A sector is a distinct segment of the stock market, each with its own characteristics and dynamics. When conducting investment research, it’s important to consider how different sectors interact and how these relationships could impact your returns. If you’re investing in sector funds or ETFs, be sure to examine the expense ratio for each fund and weigh it against the potential for earnings growth.
Tips for Investing
- Consider talking to a financial advisor about which market sectors to focus your portfolio on. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Diversification is an important part of any good investment strategy. When you diversify across different sectors and industries, you’re effectively spreading out risk. If one sector underperforms, for example, that could be balanced out by a sector that suddenly takes off. Keeping diversification in mind is important when choosing mutual funds since you don’t want to make the mistake of ending up over-weighted with multiple funds from the same sector.
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