When they start classifying companies, the first thing they do is break them down into sectors. And it is the breakdown by sector that investors primarily look at in fundamental analysis. We investors do not control the course of the economy, but we can adapt to the ebb and flow of the economy.
Understanding the mechanics of these sectors gives me several important opportunities. With it you can:
- Diversify assets – pick stocks from different sectors that are weakly correlated with each other, and thereby reduce the risk of the portfolio.
- Adjust for the current phase of the business cycle.
- Determine the size of the hedging stake.
- Reach individual industries or sectors through the purchase of exchange-traded funds.
Sectors on the example of the S&P 500 index
The S&P 500 is a stock index that includes the 500 largest capitalized companies traded on US exchanges. Companies in the index are divided into 11 sectors.
The sector consists of companies engaged in the extraction of raw materials and their primary processing. The commodity sector is the smallest in the US market, accounting for just over 2% of the S&P 500 capitalization.
The oil and gas sector includes companies involved in exploration, production, primary processing, transportation, storage of oil, gas and other consumed fuels.
Oil and gas stocks are a good balancing tool for a portfolio with a large number of high-dividend stocks.
Companies in the sector provide industrial products and services. The industrial sector is economically sensitive.
The utilities sector performs well during a crisis, and during the acceleration of the economy, at an early stage of the cycle, it usually loses popularity because investors prefer more aggressive and growing assets.
This is one of the smaller sectors, but it can be an excellent tool for portfolio diversification – due to low correlation with other sectors – as well as a hedge against inflation.
The consumer goods sector includes companies that produce essential goods. These are basic products that people cannot refuse even in a difficult financial situation.
The sector is stable, not cyclical. Stocks are usually dividend-paying, with steady but unimpressive growth.
Companies in the sector offer non-essential goods, as well as services that can be temporarily abandoned during an economic downturn. These are cars, furniture, household appliances, hotels, restaurants, cinema, television, clothing.
The youngest and most controversial sector, which occupies just over 10% in the index.
Companies in the sector provide financial services to businesses and retail clients. These are banks, investment and insurance companies. The sector is the third largest in the S&P 500 index.
These are companies providing medical services, engaged in research in this area, manufacturers of medical supplies.
The sector includes companies associated with the development of technological products: electronics, software, computers and components. This is the largest sector in the S&P 500 index, accounting for a quarter of its capitalization.
We advise betting on real estate, IT, industrial and financial sectors. At the same time, it is important to carefully approach the analysis of issuers and fundamental indicators (debt level, business margin). All this will help to survive the crisis period.