The U.S. market trades more than 4 thousand. Shares, more 2000 depositary receipts and 2200 Papers ETF. Within S&P 500 there are 11 Sectors. Each sector, in its turn, subdivided into industries.
Why is knowledge of sectors useful?
1. Diversification. To create a portfolio of shares, it makes sense to limit yourself to about 5-15 companies from different sectors. The easiest way is to divide the investment equally. Knowledge of the sectors will help you choose weakly correlated stocks, reducing portfolio risk.
More conservative approach: most of it should be invested in liquid and stable companies, and the remaining money into high-risk stocks. Diluting the portfolio with bonds, as well as foreign papers, you can get a fairly balanced set.
2. Concentration (point ideas). If you believe in the long-term prospects of any industry or expect catalysts to appear in a certain segment, information on the structure of the sectors will allow you to optimally select the right papers.
New drivers appear in different periods, breakthrough technologies and business models, and therefore growth leaders. In the last decade, these are the sectors of high technology and communication services.. Modern megatrends – e-commerce and payments, Streaming, artificial intelligence, big data.
3. Valuation of comparable companies. Comparative assessments can be made in the sectors of interest. It's about finding undervalued papers.. They can be found by comparing stocks with median values by sector (Industry). Compare is worth the multipliers, profitability indicators, debt load, dividends, expectations on income dynamics, volatility, discount of stocks to analysts' average targets.
4. Dependence on business cycles. We are talking about a section in 1-10 years. The full cycle covers three periods: revival, expansion and contraction of the economy. There are also four phases.: Early, Average, late and recession.
A source: fidelity.com Source: fidelity.com
Each stage covers several years. At different stages, certain sectors are most relevant, cyclic or protective papers..
A source: fidelity.com Source: fidelity.com
Information Technology (Information Technologies)
A large number of "growth stocks" are concentrated in the sector, although there are promising dividend stories within mature companies. Many bets on breakthrough ideas relate to the high-tech sector.
Industry:
– Communication equipment
– Electronic equipment and components
– IT-services
– Semiconductors
– Software
– Technological "iron"
Key ETF: Technology Select Sector SPDR (XLK)
Top 5 stocks, according to market capitalization: Apple, Microsoft, NVIDIA, VISA, MasterCard
Health Care (healthcare)
Less dependent on economic cycles. People don't choose, whether they are sick or not. In favor of the health sector in the long term may play a trend of aging populations in developed countries. There are specific risks in the segment, related to the testing of new drugs, Competition, expiration of patents, actions of regulators. Large biotechnology companies gradually moved to the status of biopharmaceutical. The coronavirus pandemic has become a positive long-term driver for businesses..
Industry:
– Biotechnology
– Healthcare equipment
– Health Services
– Technologies for Healthcare
– Research Tools and Services
– Pharmaceutics
ETF: Health Care Select Sector SPDR (XLV)
Top 5 stocks: Johnson&Johnson, UnitedHealth, Pfizer, Thermo Fisher Scientific, Eli Lilly
Consumer Discretionary (Consumer goods of secondary necessity)
The most "branded" sector, whose company is often on hearing. Characterized by dependence on fluctuations of the economic cycle. The products of these enterprises can be temporarily abandoned during an economic downturn..
Industry:
– Automotive Components
– Cars
– Distributors
– Diversified consumer services
– Hotels & Restaurants
– Durable household goods
– Online Retail
– Entertainment Products
– Diversified retail
– Specialized retail
– Textile, clothing and luxury goods
ETF: Consumer Discretionary Select Sector SPDR (XLY)
Top 5 stocks: Amazon, Tesla, Home Depot, Nike, McDonald’s
Communication Services (Communication services)
The segment is formed on the basis of companies, formerly part of the telecommunications sector, high technologies and manufacturers of secondary goods. Telecoms — dividend segment. Mainly focused on domestic demand. Communications services enterprises operate by subscription, therefore, papers are considered to be "protective", although some of its representatives are not alien to technological changes.
Industry:
– Diversified telecommunication services
– Wireless telecommunication services
– Entertainment
– Media
– Interactive media and services
ETF: Communication Services Select Sector SPDR (XLC)
Top 5 stocks: Alphabet, Meta (Facebook), Walt disney, Netflix, Comcast
Financials (Financial)
Financial Corporations Thrive in Economic Growth: increase in demand for loans and trading activity in the securities market. Increase in rates FED favorable for many American banks, as it improves their interest margin (net interest income). A similar situation with the insurance industry due to the structure of balance sheets. Financial sector stocks are positively correlated with Treasuries returns.
Industry:
– Banks
– Capital Markets
– Consumer Finance
– Diversified financial services
– Insurance
– Mortgage REITs
– Mortgage Finance
ETF: Financial Select Sector SPDR Fund (XLF)
Top 5 stocks: Berkshire Hathaway, JP Morgan, Bank of America, Wells Fargo, Morgan Stanley
Read the best materials on the American market on the BCS USA channel in Telegram. Here you will find market reviews, ideas for investment, various studies, cognitive diagrams.
Industrials (Industrial)
The dynamics of the sector's stocks are positively correlated with economic cycles. When the Economy Thrives, paper "on horseback". Only if there are favorable trends in the economy, companies will build, produce and transport goods. Here you will need machines., machinery and equipment. Risk factor – high capital intensity of the sector. Most of the "dividend kings" are concentrated in the industrial sector and manufacturers of essential goods.
Industry:
– Aerospace & Defense
– Air cargo delivery and logistics
– Airlines
– Construction Products
– Commercial services
– Construction and Engineering
– Electrical equipment
– Industrial conglomerates
– Heavy machinery
– Sea cargo transportation
– Professional services
– Railways
– Trading companies and distributors
– Transport infrastructure
ETF: Industrial Select Sector SPDR (XLI)
Top 5 stocks: United Parcel Service, Honeywell International, Union Pacific, Raytheon Technologies, Boeing
Consumer Staples (Consumer essential goods)
The segment is stable, essential goods are always needed. Securities of representatives of the sector are relatively stable in the fall of the market. They are considered to be protective., but they often do not grow so actively. Most of the "dividend kings" are concentrated in this sector and the industrial sector.. This is the name of the company, which increase payments not less than 50 consecutive years.
Industry:
– Drinks
– Grocery retail
– Food
– Home Products
– Personal care products
– Tobacco
ETF: Consumer Staples Select Sector SPDR (XLP)
Top 5 stocks: Wal-Mart, Procter&Gamble, Coca Cola, Pepsi Co, Costco Wholesale
Utilities (Energy)
Small sector by number of companies, but may be interesting as a hedge against crisis trends in the market, as well as receiving high dividend payments. Renewable Energy Segment, including solar technologies, in the long run, it can please a patient investor.
Industry:
– Electricity
– Gas power engineering
– Renewable energy
– Diversified energy
– Water energy
ETF: Utilities Select Sector SPDR (XLU)
Top 5 stocks: NextEra Energy, Duke Energy, Southern Co, Dominion Energy, Exelon
Materials (Materials (edit))
As well as the oil and gas sector, depends on the movements of commodity markets, including metals.
Industry:
– Chemistry
– Materials for construction
– Containers and packaging
– Metallurgy
– Paper and wood products
ETF: Materials Select Sector SPDR (XLB)
Top 5 stocks: Linde PLC, Sherwin-Williams, Air Products and Chemicals, Ecolab, Freeport-McMoRan
Real Estate (The property)
Industry:
– Equity REITs (buys and rents real estate of various plans)
– Real Estate Development
Real Exchange Investment Trusts, who invest in real estate. Have a high dividend yield. REIT investments allow you to earn on the growth of the real estate market, diversify investments, protect against potential inflation in the U.S.. In this case, the tool, as opposed to real estate, has high liquidity and has a low entry threshold.
ETF: Real Estate Select Sector SPDR (XLRE)
Top 5 stocks: American Tower, Prologis, Crown Castle International, Equinix, Public Storage
Energy (Oil & Gas)
Extremely dependent on raw material quotations. In theory, it is negatively correlated with the dollar exchange rate. Securities can be an alternative to investing in commodity markets, at the same time, there may be specific risks of the issuer.
Industry:
– Оборудование и услуги для нефтегаза
– Oil, газ и потребляемое топливо
ETF: Energy Select Sector SPDR (XLE)
Top 5 stocks: Exxon Mobil, Chevron, Conoco Phillips, EOG Resources, Schlumberger
More useful information for investors you will find on BCS Express.
