Why do we need to understand the sectors of the stock market?
For passive index investing, understanding sectors allows you to see what percentage each sector makes up within your Total Market ETF or Mutual Fund. As you’ll see later on, a Total Market ETF is not balanced between the 11 sectors; two sectors alone make up 40% of a total market ETF.
If you’re an active investor that buys individual stocks, understanding each sector allows you to see if there are any you’re extremely overweight in. Knowing this information can aid in making decisions about your portfolio.
In addition, there many sector ETFs available that allow investors to tilt their portfolios towards specific sectors. For example, there are Financial and Healthcare ETFs. Keep in mind, these ETFS are usually actively managed funds and come with higher fees and turnover than a total market ETF.
So, what are the stock market sectors?
List of Stock Market Sectors
- Information Technology
- Consumer Discretionary
- Consumer Staples
- Real Estate
Healthcare is made up of health insurance companies and pharmaceuticals. Examples of this include United Health Care, Molina, Humana, Abbvie, or Johnson & Johnson.
Sector ETF: XLV
Here we are looking at communication providers like Tmobile, Verizon, Facebook, Comcast, and Google. This sector includes telecom and media companies.
Sector ETF: XLC
Information Technology Sector
The Information Technology sector is made up of companies that are in the hardware and software business. Microsoft, Apple, Nvidia, AMD, etc. Sometimes there is some confusion about what tech stocks are. For instance, Amazon is often listed as a tech stock; yet, a good bit of its business isn’t really tech. Tesla is seen by some to be a tech stock. This happens with companies like Cisco as well, which is also in the communications sector.
Sector ETF: XLK, IYW
In the Industrial Sector we are looking at infrastructure, transportation companies, heavy machinery, etc. Think Dow Jones. A few examples include Old Dominion Freight Line, Caterpillar, and John Deere.
Sector ETF: XLI
Materials include metal producers, chemical companies, forestry, packaging companies. A few examples include Packaging Corporation of America, Westrock, Cleveland Cliffs, Eastman Chemicals, Steel Dynamics, Southern Copper, and more.
Sector ETF: XLB
Consumer Discretionary Sector
Consumer discretionary are basically items consumers don’t HAVE to have but purchase them as more of a luxury item. This includes things like Amazon,retail clothing stores, and car manufacturers. Nike, Macy’s, Foot Locker, and Ford are a few examples of stocks in the consumer discretionary sector.
Sector ETF: XLY
Consumer Staples Sector
Consumer staples are things consumers can’t do without; food for example. A few examples include General Mills, Kellogg, Proctor and Gamble, and Kimberly Clark.
Sector ETF: XLP
The energy sector is mainly comprised of gas and oil companies. Exxon, Shell, Phillips 66, Equinor, and Baker Hughes Company.
Sector ETF: XLE
With financials, we are talking about banks, investment banks, and asset managers. Some examples include JP Morgan, T. Rowe Price, Charles Schwab, and Morgan Stanley.
Sector ETF: XLF
The utilities sector is made up of electric, gas, and water utility companies. A few examples include Southern Company, American Water Works, Exelon Corp, Dominion Energy, Portland General Electric Company, and more.
Sector ETF: XLU
Real Estate Sector
The real estate sector is made up of companies that own hotel properties (hospitality), shopping malls, warehouses, or data centers. A few examples include the Simon Property Group, Medical Properties Trust, Equinix, American Tower, and more.
Sector ETF: VNQ
Total Stock Market Index by Sector
If we look at the Total Stock Market Index, here is the current breakdown by sector.
- Information Technology 26.1%
- Healthcare 13.66%
- Consumer Discretionary 11.13%
- Finance 11%
- Industrials 8.64%
- Energy 4.32%
- Real Estate 3.49%
- Materials 2.75%
As you can see, IT makes up the largest percentage of the total stock market index. Materials and Real Estate together account for less than 7%.
What does this tell us? One could argue that by only owning a total stock market index fund, you are overweight technology and healthcare.
Another thing to keep in mind if you buy individual stocks AND own a Market ETF/Mutual Fund-you could be even more overweight technology if you buy a bunch of tech stocks. Perhaps if you buy individual stocks, you would want to give yourself more allocation to things the total market is underweight in. This is kind of what I do. I own a good number of materials and industrial stocks in my own portfolio. I own only one individual tech stock.
Some people try to tilt their portfolios more towards certain sectors if they believe a recession is going to hit. These are considered ‘safer’ sectors. Some examples include Healthcare, Consumer Staples, and Utilities.
Here is a great page by Fidelity that shows the performance of different sectors over time.
A quick summary-over the last 10 years, IT outperformed everything else. Consumer Discretionary takes 2nd place. However, take note of this-Energy is the worst performing sector over the last ten years (it’s up only 10%!). Yet, over the last year, energy has completely destroyed everything else. I guess the moral of the story is past performance isn’t a guarantee of future performance.
I personally don’t use sector ETF investing in my own investing. The one time I bought a Healthcare sector fund, it didn’t work out any better than if I had bought a total market ETF. I find the problem with sector ETFs is they are like stocks; you have to know when to buy and when to sell. Furthermore, they are more volatile to macro-economic or political changes. Anyone that has held a healthcare sector ETF during an election year can tell you this.
I will make this disclaimer-I do still hold XLE and have since March 2020. Oil had crashed hard but I didn’t trust myself to know which oil stock to buy, so I bought an Energy ETF instead.
I sincerely hope this information helps you learn more about the US stock market and its various sectors. Go back to your portfolio, see how much of each sector you are holding, and compare it to the total market. Does your portfolio contain more or less of each sector?