What Is a Sector Breakdown?
A sector breakdown is the mix ofindustry sectors, like technology or healthcare,held by a fund or portfolio, typically expressed as a percentage. Sector designations can vary depending on the fund’s investment criteria and overall objective.
Key Takeaways
- The sector breakdown of a portfolio shows how much asset weights are allocated to what industry sectors.
- Sectors are broad classifications such as consumer staples, healthcare, or technology.
- A well-diversified portfolio includes investments in multiple sectors.
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Sector Investing
A sector breakdown can help an investor observe the investment allocations of a fund. Fund companies regularly provide sector reporting in their marketing materials. Sector investing can influence investments in the fund. A fund may target a specific sector such as technology, or seek to diversify among many sectors.
Some funds may have restraints on sector investments. This may occur with environmental, social, and governance (ESG) focused funds. These funds seek to exclude industries or companies that their investors consider undesirable for various reasons such as tobacco producers or oil exploration companies.
A sector fund allocates 100% to a specified sector, such as healthcare, technology, or energy.
GICS
The Global Industry Classification Standard, also known as GICS, is the primary financial industry standard for defining sector classifications. GICS was developed by index providers MSCI and the S&P Dow Jones. Its hierarchy begins with 11 sectors which can be further delineated to 25 industry groups, 74 industries, and 163 sub-industries. It follows a coding system that assigns a code from each grouping to every company publicly traded in the market.
11 Sectors
The eleven sectors defined by GICS include:
- Energy
- Materials
- Industrials
- Consumer Discretionary
- Consumer Staples
- Health Care
- Financials
- Information Technology
- Telecommunication Services
- Utilities
- Real Estate
Diversification
A diversified stock portfolio will holdstocksacross most GICS sectors. Diversification across stock sectors helps to mitigate idiosyncratic or unsystematic risks caused by factors affecting specific industries or companies within an industry. Sector indexes can be used by investors seeking to invest in the growth prospects of a single sector.
Investment companies offer passive index funds that seek to replicate each of the eleven GICS sectors. The Vanguard Information Technology Index Fund is one example of a passively managed mutual fund that replicates the holdings of the MSCI U.S. Investable Market Information Technology Index.
What Is the Five Percent Rule?
A well-diversified portfolio includes as many sectors as possible and does not concentrate too many funds into a single sector or related sectors. Investors can employ the five percent rule with sector funds. To diversify within specialty sectors, such as biotech, commercial real estate, or gold miners, investors keep their allocation to 5% or less for each.
What Industries Are Included in the Energy Sector?
The Energy Sector includes companies that target oil, gas, coal, and consumable fuels through exploration and production, refining and marketing, and storage and transportation. The sector also includes companies that offer oil and gas equipment and services.
How Are Companies Classified Under GICS?
Every company is assigned a GICS classification at the sub-industry level
according to its primary business activity. MSCI and S&P Dow Jones Indices use revenues and earnings to determine a company's principal business.
The Bottom Line
Sectors are broad classifications such as consumer staples, healthcare, or technology. The Global Industry Classification Standard is the primary financial industry standard for defining sector classifications. The sector breakdown of a portfolio shows how much asset weights are allocated to what industry sectors and are commonly expressed as a percentage.
