What’s in a Sector?

The S&P 500 stocks may be divided into sectors, as follows:

Energy
Consumer Discretionary
Consumer Staples
Health Care
Information Technology
Financials
Industrials
Materials
Communication Services
Utilities

Why is this important? Just as all stocks do not move in lockstep, each sector of the S&P 500 follows its own path. Some exhibit more growth characteristics; others might have less volatility and be safer in down markets. The advent of electronically traded funds (ETFs) allows individual investors to invest in sectors, instead of investing in the stock market as a whole, for example, with an index fund. In this way the investor may craft an investment management strategy that conforms to his or her risk profile and outlook on the economy.

Sectors may be further divided into industries, then to individual companies. Investing in a sector as whole gives the investor more diversification than choosing an industry or individual company.

However, S&P Dow Jones, the manager of the indices, recently revised the classification of some of the larger companies in the S&P 500, which, in turn, may affect the performance of ETFs. The telecommunications sector, for example, was expanded beyond telephone and wireless carriers, so as to reflect better the changing economy. The new Communication Services sector includes Facebook, Alphabet, PayPal, Netflix, Walt Disney, and Snap.

Amazon remains in the Consumer Discretionary group, and Apple will anchor the Information Technology index, representing about a fifth of that sector. The IT sector had been 20% of the S&P 500, but now is about 15%.

The markets reacted calmly to these changes, but the new classifications could influence investor choices and strategies in the future.