You might know if the stock market is going up or down, but do you know what industry sectors are driving returns? The use of sectors is one of the most common ways to characterize markets, and the most used system is the Global Industry Classification System (GICS).
Created in 1999 by investment providers MSCI and S&P Dow Jones Indices, GICS divides every publicly traded company into 11 sectors and then further divides them into industry groups, industries and subindustries according to their principal business activity.
GICS was designed to standardize industry definitions and to enable accurate comparisons. These classifications can be can be used in the design of funds, including mutual funds and exchange-traded funds (ETFs) that specialize in tracking certain sector and industry indexes. Funds that focus on specific sectors or industries can be passively managed, meaning they seek to replicate the allocations and returns of a certain index, or actively managed, meaning that the fund managers may pursue strategies intended to outperform an index.
How Classification Can Help Investors
GICS breaks down thousands of global stocks into their primary business categories and then further divides them into one of the following sectors: Communication Services, Consumer Discretionary, Consumer Staples, Financials, Energy, Health Care, Industrials, Information Technology, Materials, Real Estate and Utilities.
Certain sectors are self-explanatory, such as Health Care, which includes hospitals and pharmaceutical companies, or Financials, which consists of companies involved in banking, lending, consumer finance, investment banking and more. But other sector names might sound vague to those unfamiliar with GICS.
For example, there are two consumer categories: Consumer Staples includes companies such as food retailers, pharmacies, tobacco companies and household products manufacturers, while Consumer Discretionary covers businesses ranging from hotels to restaurants to media companies and online retailers. Automotive stocks, including electric vehicle makers, are also included in the Consumer Discretionary sector. You can think about these two sectors in terms of the difference between need-to-haves, like groceries, and nice-to-haves, like a vacation.
Certain sectors benefit from strengthening business cycles, while others are considered defensive and might be more immune to economic fluctuations. Using GICS classifications, you can gauge an industry’s or a company’s performance more easily by comparing it to that of peers within a given group rather than comparing companies at random.
While it’s easy enough to know that a bank is in the business of finance, for example, is a company that sells services online a technology company or a retailer? And is an online payment app company a finance or technology firm? As more companies cross industry lines, it’s harder to determine what to compare them to, and that’s how GICS sector classification can help.
To keep up with these changing dynamics, MSCI and S&P conduct annual reviews of the GICS structure. These reviews have led to several reclassifications over the years, as well as the introduction of new subsectors and the retiring of others.
Your prospectus or annual report will show the sectors that your mutual fund or ETF is invested in and how much is allocated toward each sector. Depending on your fund’s investment criteria, it may be invested in just one sector or across many.
As you research investments, you might also see a “SIC code” on the various reports or disclosures a company sends to the Securities and Exchange Commission (SEC). SIC stands for Standard Industrial Classification and is a coding system used by the SEC staff to indicate which office is responsible for reviewing a company’s filings.
Use FINRA’s Fund Analyzer to compare mutual funds, ETFs and money market funds and their costs.
Learn more about GICS from MSCI and S&P Global.