Publicly traded companies can be classified in different ways. One way to categorize companies is by using a standardized classification system. Several classification systems exist. One commonly used system in finance is the Global Industry Classification Standard (GICS®). The GICS was started in 1999 by Morgan Stanley Capital international (MSCI) and Standard & Poor’s (S&P) Dow Jones Indexes.[i] Today, S&P and MSCI indexes use GICS to classify companies. In this article we’ll take an in-depth look at GICS sectors.
Classification systems may define sectors in different ways depending on how they are grouping companies. Sectors may also be referred to as market sectors or investment sectors. In the GICS system, sectors are the most general group a company can belong to. There are currently 11 GICS sectors.[ii] Beyond sector groupings, companies also belong to an industry group, an industry and a sub-industry.[iii] GICS classifies companies using both a quantitative and a qualitative perspective, and classifications can change over time. In fact, in 2018 GICS added a new sector called Telecommunications Services. This change involved reclassifying a number of different companies from other sectors.
The 11 GICS sectors are Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Communication Services, Utilities and Real Estate.[iv]
Classification of companies can provide a useful framework for understanding how similar types of companies may react to certain market influences. For example, Consumer Discretionary stocks generally cover nonessential goods and services. Therefore, this category may be more economically sensitive than Consumer Staples stocks, which usually include more essential items. Another example is Health Care stocks. These may be driven more by necessity, rather than sensitivity to economic growth, as medication and hospital services are often essential. If you are positioning your portfolio based on market conditions, understanding how sectors typically perform can be helpful investing information.
Additionally, if you are selecting individual stocks to invest in, it can be worthwhile to evaluate them in comparison to similar stocks. You may wish to increase your portfolio’s exposure to a certain area of the market. Evaluating what stocks are the best investment opportunities for your money may require comparing multiple companies in the same sector.
Investors can also use stock classification to evaluate their current assets. Understanding what stocks belong to which market sectors can help you with portfolio diversification. This could allow you to see when you might be taking on unnecessary risk by over-concentrating on too narrow a market sector relative to the broader market. For example, if your assets are overly concentrated in technology stocks and the technology sector drops relative to the broader stock market, your portfolio could be hit much harder than a well-diversified one.
Classifying companies is not an exact science, but understanding how different types of companies perform in the stock market can be helpful. Individuals may also use classification information when figuring out how to diversify their portfolio. But investing and diversifying your portfolio is not always easy on your own. We may be able to help you manage your investments. Contact Fisher Investments to find out how we can help.
[i] Source: Global Industry Classification Standard (GICS®), as of 07/09/2019. https://www.msci.com/documents/1296102/11185224/MSCI_GICS_Overview.pdf/cfdc73ec-9704-1685-7742-96bf2c3ec699
[iv]Source: GICS®: Global Industry Classification Standard, S&P Global, MSCI, as of 07/09/2019. https://www.spglobal.com/marketintelligence/en/documents/112727-gics-mapbook_2018_v3_letter_digitalspreads.pdf