When you are investing in a stock, it’s probably a good idea to understand which industry the company is in. The S&P 500 is split into 11 industries, and stocks within sectors (sometimes) move together. In this short note, we will look at each of the sectors and think about some typical constituents.
The stock market can be a complex and intimidating place for beginners, but understanding the different industries and sectors can help make the process of investing much easier. Grouping companies into industries can help simplify the process of diversifying your portfolio, and by understanding the characteristics of different industries, investors can make informed decisions about where to allocate their funds.
The technology sector is the largest S&P sector and includes companies involved in the development, manufacturing, or distribution of tech-related products and services. These companies produce computer software programs or electronic hardware and research and develop new technologies. Tech stocks are typically cyclical, performing better in stronger economies. However, during the COVID-19 pandemic, many tech stocks saw a boost as demand for things like video-conferencing platforms and cloud storage increased with the adoption of remote work. Some of the biggest tech stocks include Facebook (META), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), and IBM (IBM).
Health Care Sector
The healthcare sector includes pharmaceutical companies, companies that produce or distribute medical equipment and supplies, and companies that conduct healthcare-related research. The healthcare sector also includes alternative health companies such as GW Pharmaceuticals, a drug developer focused on cannabis. Traditional healthcare companies include CVS (CVS), Johnson & Johnson (JNJ), UnitedHealth Group (UNH), Thermo Fisher Scientific (TMO), and Regeneron (REGN). Healthcare stocks are typically non-cyclical, as demand for these products and services usually doesn’t hinge on economic movements.
The financial sector covers a variety of industries, including banking and investing. Banks, credit unions, mortgage companies, wealth management firms, credit card companies, and insurance companies are all part of the financial sector. Financial services companies are usually categorised as cyclical. For example, a credit card issuer’s profit margins may shrink during a recession if unemployment rises and people spend less or cannot keep up with credit card payments. However, mortgage companies may benefit during recessionary periods if lower interest rates spur home-buying activity. Some of the biggest names in the financial sector include Visa (V), JPMorgan Chase (JPM), Bank of America (BAC), PayPal Holdings (PYPL), and Mastercard (MA).
Real Estate Sector
Real estate is a relatively new addition to the S&P sectors list and includes real estate investment trusts (REITs), realtors, developers, and property management companies. REITs invest in income-producing properties and pay 90% of profits out to investors as dividends. Investing in real estate can be a defensive move as this sector is largely uncorrelated with stocks. So, if stock prices fall, investors may not see a correlating drop in real estate investments as property generally tends to appreciate over time. Examples of real estate companies in the S&P 500 include Digital Realty (DLR), American Tower (AMT), Prologis (PLD), Simon Property Group (SPG), and Boston Properties (BXP).
The energy sector includes companies that participate in the production and/or distribution of energy. That includes the oil and gas industry as well as companies connected to the development or distribution of renewable energy sources. Energy stock investments can be more sensitive to economic movements and supply-demand trends compared to other sectors. Some of the biggest energy sector companies include Exxon Mobil (XOM), Royal Dutch Shell (SHEL), Chevron (CVX), ConocoPhillips (COP), and Halliburton (HAL).
The materials sector includes companies connected to the sourcing, processing, or distributing of raw materials. That includes things like lumber, concrete, glass, and other building materials. Materials are one of the cyclical S&P sectors, as it can be driven largely by supply and demand. During a housing boom, for example, the materials sector may benefit from increased demand for lumber, plywood, and other construction materials. Material stocks in the S&P 500 include Dupont (DD), Celanese (CE), Sherwin Williams (SHW), Air Products & Chemicals (APD), and Eastman Chemical (EMN).
Consumer Discretionary Sector
The consumer discretionary sector is a largely cyclical sector that includes companies in the hospitality and entertainment sectors, as well as retailers. Generally, these companies represent things consumers may spend more money on in a thriving economy and cut back on during a downturn. Examples of stocks that fit into the consumer discretionary sector are Starbucks (SBUX), AMC (AMC), Best Buy (BBY), Home Depot (HD), and Nike (NKE).
The industrial sector covers a broad range of industries, including those in the manufacturing and transportation sectors. Industrials are often considered to be cyclical stocks, again because of how they react to changes in supply and demand. The airline industry, for example, saw a steep decline in 2020 as air travel was curtailed due to the coronavirus pandemic. Some examples of industrial sector stocks include Honeywell (HON), 3M (MMM), Stanley Black & Decker (SWK), Delta Airlines (DAL), and Boeing (BA).
Utilities represent one of the core defensive S&P sectors. This sector includes companies that provide gas, electricity, water, and other utilities to households, businesses, farms, and other entities. Since these are essentials that people typically can’t do without, they’re generally less sensitive to major shifts in the economic cycle. They also often pay dividends to their investors. Examples of utility stocks include AES (AES), UGI (UGI), CenterPoint Energy (CNP), Duke Energy (DUK), and Dominion Energy (D).
Consumer Staples Sector
Consumer staples stocks represent things consumers regularly spend money on. That includes groceries, household products, and personal hygiene products. The consumer staples sector is also a defensive sector because even when the economy hits a rough spot, consumers will continue spending money on these things. Companies that are recognized as some of the top consumer staples stocks include General Mills (GIS), Coca-Cola (KO), Procter & Gamble (PG), Conagra Brands (CAG), and Costco Wholesale (COST).
Last, but not least on the list of S&P sectors is the communications sector, which spans companies that provide communications services of some kind. That can include landline phone services, cellular phone services, or internet services. Communications also include companies responsible for producing movies and television shows. The communications sector can be hard to pin down in terms of whether it’s cyclical or defensive. In a down economy, for example, people may continue to spend money on phone and internet services but cut back on streaming services. Companies that belong to this sector include Comcast (CMCSA), AT&T (T), Dish Network (DISH), Discovery Communications (WBD), and Activision Blizzard (ATVI). Overall, it is important to remember that the sector or industry can relate similar stocks together, but it is important to understand the stocks within these categories can be completely different and have completely different returns. Always talk to a qualified professional before investing.
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