The S&P sectors represent the different categories that the index uses to sort the companies it follows. S&P refers to Standard & Poor; the S&P 500 index tracks the movements of 500 large-cap US companies. A number of mutual funds and exchange-traded funds (ETFs) use this index as a benchmark.
The Global Industry Classification System (GICS) has 11 stock market sectors in its taxonomy. It further breaks down these 11 sectors into 24 industry groups, 68 industries, and 157 sub-industries.
Understanding how the S&P sectors work and break down further can help both institutional and retail investors manage risk through different economic cycles by allocating their portfolio across multiple sectors. For example, cyclical stocks and cyclical sectors tend to fare well when the economy booms. During a recession, however, defensive stocks may outperform them. However, it’s also possible for all 11 sectors to trend in the same direction.
Examining the 11 Sectors of the S&P
Here’s a look at the S&P Sector List:
Technology represents the largest S&P sector. This sector includes companies involved in the development, manufacturing, or distribution of tech-related products and services. For example, companies in the technology sector may produce computer software programs or electronics hardware or research and develop of new technologies.
Tech stock investments are typically cyclical, in that they usually perform better in stronger economies. But during the coronavirus pandemic, many tech stocks saw a boost as demand for things like video-conferencing platforms and cloud storage increased as more companies adopted remote work.
The technology sector includes a number of growth stocks, which are companies that reinvest most or all of their profits in expansion versus paying dividends. Examples of the biggest tech stocks include Facebook (FB), Apple (AAPL), Microsoft (MSFT), Alphabet (Goog), and IBM (IBM).
2. Health Care
The next largest of the S&P sectors is health care. This sector includes pharmaceutical companies, companies that produce or distribute medical equipment, and supplies and companies that conduct health care-related research.
The health care sector also includes alternative health companies. For example, GW Pharmaceuticals is a drug developer focused on cannabis. The company develops medical marijuana products to treat various health conditions. As such, it’s generally considered part of the health care sector.
More traditional examples of healthcare sector companies include CVS (CVS), Johnson & Johnson (JNJ), UnitedHealth Group (UNH), Thermo Fisher Scientific (TMO), and Regeneron (REGN). Health care stocks are typically non-cyclical, as demand for these products and services usually doesn’t hinge on economic movements.
The financials 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 categorized as cyclical. For example, a credit card issuer’s profit margins may shrink during a recession if unemployment rises and people spend less or can not keep up with credit card payments. But this can be subjective, as 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).
4. Real Estate
Real estate is a relatively new addition to the S&P sectors list. This sector includes real estate investment trusts (REITs) as well as 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, for example, 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. For example, gas and oil prices declined in 2020 as stay at home orders kept drivers off the roads. Gas prices shot up in 2021, however, following the Colonial Pipeline hack which sparked fears of fuel shortages.
Some of the biggest energy sector companies include Exxon Mobil (XOM), Royal Dutch Shell (RDS.A), Chevron (CVX), Conocophillips (COP), and Halliburton (HAL).
The materials sector includes companies connected to the sourcing, processing or distribution of raw materials. That includes things like lumber, concrete, glass, and other building materials.
Materials is 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).
7. Consumer Discretionary
The consumer discretionary sector is a largely cyclical sector that includes companies in the hospitality and entertainment sectors, as well as retailers. Starbucks (SBUX), AMC (AMC), Best Buy (BBY), Home Depot (HD), and Nike (NKE) are examples of stocks that fit into the consumer discretionary sector.
Generally, these companies represent things consumers may spend more money on in a thriving economy and cut back on during a downturn. That’s why they’re considered cyclical in nature.
The industrial sector covers a broad range of industries, including those in the manufacturing and transportation sectors. For example, Honeywell (HON), 3M (MMM), and Stanley Black & Decker are included in the industrials space alongside companies like Delta Airlines (DAL) and Boeing (BA).
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.
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 utilities stocks include AES (AES), UGI (UGI) and CenterPoint Energy (CNP), Duke Energy (DUK) and Dominion Energy (D).
10. Consumer Staples
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.
From an investment perspective, consumer staples stocks may not yield the same return profile as other sectors. But they can provide some stability in a portfolio when the market gets shaky.
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 communications. This sector spans companies that provide communications services of some kind. That can include landline phone services, cellular phone services, or internet services. Communications also includes 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. So there’s an argument to be made that the communication sector is a little of both.
Companies that belong to this sector include Comcast (CMCSA), AT&T (ATT), Dish Network (DISH), Discovery Communications (DISC),and Activision Blizzard (ATVI).
Knowing what the S&P sectors are and which types of industries or sub-industries they represent can help investors achieve diversification through different types of investments. While some financial experts liken the sectors to a pie, with 11 individual slices, it may be more helpful to think of them as a buffet from which investors can pick and choose. You can either purchase stocks within or across sectors, or look for funds that can provide that diversification for you.
If you’re ready to start building a well-rounded portfolio that includes a sampling of market sectors, it’s easy to open an account on the SoFi Invest online brokerage platform. SoFi Invest offers access to financial planners and educational resources that can help you make informed decisions.
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