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A Guide to the 11 Market Sectors

When building a portfolio, you may be interested in one or more specific market sectors. A sector is a slice of the stock market that represents a certain part of the economy or industry. Knowing how these sectors work can guide the selection of stocks, mutual funds, exchange-traded funds and other investments. While an investment advisor can provide a more in-depth look at the characteristics of various market sectors, this guide provides a primer on the stock market’s sectors.

Market Sectors Overview

In total, there are 11 sectors in the stock market, each with its own characteristics and features. Under each sector umbrella is a grouping of industries, which are represented by all the companies in that industry that trade on the stock market. Here’s an at-a-glance look at what the 11 market sectors are and the number of industries they represent:

  • Communication services – 5 industries

  • Consumer discretionary – 11 industries

  • Consumer staples – 6 industries

  • Energy – 2 industries

  • Financials – 7 industries

  • Healthcare – 6 industries

  • Industrials – 14 industries

  • Information technology – 6 industries

  • Materials – 5 industries

  • Real estate – 2 industries

  • Utilities – 5 industries

It’s worth noting that real estate is the newest sector to be added to the list. It wasn’t until 2016 that real estate was officially recognized as its own market sector. Previously, real estate investments had been grouped in with the financials sector on the S&P 500.

What Are the Biggest Market Sectors?

If you’re trying to determine the biggest market sector is, you could base it on the number of industries covered. In that scenario, it would seem that industrials would be the largest sector overall while energy and real estate would be the smallest since they only cover two industries apiece. A better way to measure sector size, however, is using market capitalization.

Market capitalization means the total market value of all of a company’s outstanding shares of stock. With stock market sectors, market capitalization is measured as the total value of all of the companies across each industry included in a particular sector.

This is a fluid number, meaning it can change daily based on how stock prices of individual companies move. But it can still be a useful way of measuring which market sector ranks as the biggest or smallest, in terms of value. For example, here’s how market capitalization compared across all 11 sectors as of mid-January 2020:

  • Communication services – $5.50 trillion

  • Consumer discretionary – $5.85 trillion

  • Consumer staples – $4.06 trillion

  • Energy – $3.25 trillion

  • Financials – $7.53 trillion

  • Healthcare – $6.26 trillion

  • Industrials – $4.58 trillion

  • Information technology – $9.58 trillion

  • Materials – $1.99 trillion

  • Real estate – $1.42 trillion

  • Utilities – $1.56 trillion

Based on the numbers, it’s immediately clear that information technology is the largest market sector based on market capitalization. This sector covers six industries, including software, technology, hardware, semiconductors and IT services. Its market capitalization is more than double that of the industrials sector, which has more than twice as many underlying industries.

Financials is another sector that rates as one of the largest, based on market capitalization. Under the financials umbrella, the biggest industry representation is banks, followed by capital markets and insurance. Healthcare, consumer discretionary and communication services round out the top list for the largest market sectors ranked by market capitalization.

Market Sector Performance

Financial services is one of the largest market sectors.
Financial services is one of the largest market sectors.

When deciding which market sectors to invest in, it’s important to look beyond size and consider how well one sector versus another performs. A simple way to measure this is in terms of how performance compares to the broader market as a whole. For example, you might compare one sector to the market using a benchmark like the S&P 500.

The key here is looking at the historical performance of one sector compared to the benchmark. So, for example, if you were to look at the 10-year of each sector compared to the S&P 500 for the period ending in January 2020, here’s how the numbers add up:

  • Communication services: +76.58%

  • Consumer discretionary: +324.02%

  • Consumer staples: +136.13%

  • Energy: + 1.56%

  • Financials: +154.81%

  • Healthcare: +224.66%

  • Industrials: +179.82%

  • Information technology: +357.78%

  • Materials: +87.38%

  • Real estate: +29.18% (3-year return)

  • Utilities: +114.00%

  • S&P 500: + 191.97%

If you’re trying to decide which sectors to invest in based on returns, then you might use sectors that outperformed the S&P as a baseline. So your list would include consumer discretionary, healthcare and information technology.

There are a couple of points to keep in mind, however, when investing by sector. First, past history isn’t an indicator of future performance. So just because a market sector has done well up to now doesn’t necessarily guarantee that it will deliver the same or a higher level of returns in the future.

Second, market sectors can be affected differently by market volatility and where the economy is in the business cycle. Financials and real estate, for example, may do better in the early stages of the business cycle versus the later stages. In a recessionary environment, consumer staples, utility companies and healthcare may get a boost as consumers direct their spending toward basic living expenses and away from borrowing or discretionary spending.

How to Invest in Market Sectors

The industrial sector remains a key part of the stock market.
The industrial sector remains a key part of the stock market.

There’s more than one way to add specific sector exposure to your portfolio. For example, you could pick a sector and buy individual stocks that represent one or all of the industries it covers. Or you could invest in a sector mutual fund or exchange-traded fund, such as a utility fund or a tech fund.

When deciding which sectors to invest in, it’s important to consider the basics, such as market capitalization and historical performance. You should also look at risk when reviewing returns. From there, you can analyze how likely a market sector is to help you properly diversify your portfolio and reach your investment goals. For example, how you approach investments will differ based on whether you’re chasing growth or looking for long-term buy-and-hold options.

Finally, it’s also important to keep an eye on market trends and the economy as a whole. As mentioned, some sectors may be more in favor during certain periods of the business cycle than others. Getting to know how the market moves during various cycles can help with positioning your portfolio to capitalize on upward trends in certain sectors while minimizing the impact of downward trends in others.

The Bottom Line

A sector represents one part of the stock market and every sector has things that make it unique. As part of your investment research, consider how one sector may play off another and how that might translate to returns. If you’re investing in sector funds or ETFs, pay attention to the expense ratio for each fund and balance that against earnings potential.

Tips for Investing

  • Consider talking to a financial advisor about which market sectors to focus your portfolio on. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.

  • Diversification is an important part of any good investment strategy. When you diversify across different sectors and industries, you’re effectively spreading out risk. If one sector underperforms, for example, that could be balanced out by a sector that suddenly takes off. Keeping diversification in mind is important when choosing mutual funds since you don’t want to make the mistake of ending up over-weighted with multiple funds from the same sector.

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