When we begin our investment training, at first we may feel like a headless chicken, wandering around without knowing where to go. With stocks, for example, there are different sectors in which to invest. It may seem like a difficult task to be able to know all the sectors that make up the actions and know based on which factors they move. Don't worry, in today's investment training we are going to analyze the main sectors of the US economy where to position our stock portfolio.
1. Basic consumption.
Let's look at the first sector that we will analyze in this investment training. The consumer staples sector (better known in English as consumer staples) is made up of companies that offer products that are essential for people. These products can range from food, beverages, personal hygiene products, home maintenance, alcohol or tobacco. One of the main advantages that the basic consumer sector has is that they are not cyclical, since they always have demand regardless of the situation of the economy.
Market capitalization vs profits and revenues of the US consumer staples sector over the last 5 years. Source: Simply Wall.st.
Companies in the basic consumer sector are characterized by offering constant and stable growth, being considered defensive stocks. At the same time, the dividends they offer are high and suffer little volatility. On the other hand, the basic consumer sector suffers when interest rates rise. Stocks in the consumer staples sector are made up of companies such as Coca Cola (KO), Procter & Gamble (PG), Costco Wholesale (COST), Philip Morris (PM) or Estée Lauder (EL). We can also diversify an investment in this sector through ETFs such as the Consumer Staples Select Sector SPDR Fund (XLP) or the iShares US Consumer Staples ETF (IYK).
2. Discretionary consumption.
The consumer discretionary sector is similar to the one we discussed in the previous paragraph. The main difference that lies in the stocks of the consumer discretionary sector is that they offer products that are not essential for people or can be considered as whims or non-basic goods. These products (or goods) can range from luxury brand objects, clothing, automobiles, entertainment and leisure.
Market capitalization vs profits and revenues of the US consumer discretionary sector over the last 5 years. Source: Simply Wall.st.
Companies in the consumer discretionary sector are characterized by performing better in times of economic prosperity, which is why they are considered cyclical. Therefore, consumer discretionary stocks often suffer in periods of rising interest rates, which can be catalysts for a potential recession. Stocks in the consumer discretionary sector are made up of companies such as Home Depot (HD), Nike (NKE), JD.com (JD), Lowe's Companies (LOW) or Airbnb (ABNB). We can also diversify an investment in this sector through ETFs such as the Consumer Discretionary Select Sector SPDR Fund (XLY) or the Vanguard Consumer Discretionary ETF (VCR).
3. Real estate.️
The real estate sector, one of the strongest sectors in the entire economy. It is one of the most resistant sectors and, in turn, one of the precursors of the great economic crisis of 2008. This sector is made up of companies that are dedicated to the sale of real estate or REITs (Real Estate Investment Trust in English), that is, real estate investment funds.
Market capitalization vs profits and income of the US real estate sector for the last 5 years. Source: Simply Wall.st.
The real estate sector is characterized by being one of the pillars of economies, where in some, such as Spain, it can comprise up to 11% of GDP. The real estate sector moves under the premises of the laws of supply and demand, although its prices fluctuate based on various economic, political, social or other factors. The real estate sector stocks are made up of companies such as American Tower (AMT), Welltower (WELL), Prologis (PLD), KE Holdings (BEKE) or Equinix (EQIX). We can also diversify an investment in this sector through ETFs such as the Vanguard Real Estate ETF (VNQ) or the Schwab US REIT ETF (SCHH).
4. Energetic.
One of the predominant sectors of this year 2022 due to the current energy crisis. Previously in In another investment training article, we teach you about raw materials in detail., one of the assets that make up the energy sector. This sector is another of the pillars of the system, since it is necessary for both people and companies. The energy sector is made up of raw materials such as oil, coal, and natural gas. At the same time, it is also included in solar, wind or hydraulic energy. It usually offers better returns when there are supply problems.
Market capitalization vs profits and revenues of the US energy sector over the last 5 years. Source: Simply Wall.st.
The energy sector usually always has stable demand, except on occasions such as cold weather where natural gas consumption may tend to increase. In turn, the present energy crisis derived from the war in Ukraine has completely altered the prices of shares in the energy sector, witnessing increases of more than 100% in natural gas or oil climbing more than 40%. This sector usually moves in a similar way to the real estate sector, where economic, political or social factors can alter its price. The energy sector stocks are made up of companies such as Chevron (CVX), Occidental Petroleum (OXY), First Solar (FSLR), Cheniere Energy (LNG) or Valero Energy (VLO). We can also diversify an investment in this sector through ETFs such as the Energy Select Sector SPDR Fund (XLE) or the iShares Global Clean Energy ETF (ICLN).
5. Technological.
One of the sectors that was most successful during the last decade and, at the same time, one of those that is suffering the most at the beginning of this decade. We have also discussed this sector and the actions that have offered the best returns to investors. The technology sector is made up of companies that produce semiconductors, software, hardware technology, information technologies (IT) or electronic components and equipment.
Market capitalization vs profits and revenues of the US energy sector over the last 5 years. Source: Simply Wall.st.
Companies in the technology sector are characterized by performing better in times of economic prosperity, which is why they are considered cyclical. As we have seen, when the economy faces periods of low economic growth, technology stocks suffer as consumers tend to spend less on these types of companies, as is the case with the consumer discretionary sector. Technology stocks are made up of companies such as Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), TSMC (2330) or Amazon (AMZN). They also have an index made up of technology stocks, the Nasdaq 100. We can also diversify an investment in this sector through ETFs such as the Invesco QQQ Trust (QQQ) or the Vanguard Information Technology ETF (VGT).
6. Finance.️
Another of the sectors that led the economy to the great crisis of 2008. The finance sector is made up of companies that offer financial services, such as REITs mortgages, diversified finance, capital markets, banks and insurance. Financial stocks are favored by periods of rising interest rates, as these increases generate more income for them.
Market capitalization vs profits and income of the US financial sector for the last 5 years. Source: Simply Wall.st.
Although, on the other hand, they are entities that can suffer from economic crises, due to the issue of non-payments or decrease in activity on the part of their clients. As we saw in the great crisis of 2008, Lehman Brothers and Bear Stearns were two of the entities belonging to the finance sector that acted as catalysts when they declared bankruptcy. The financial sector stocks are made up of companies such as Berkshire Hathaway (BRK.A), BlackRock (BLK), JPMorgan Chase (JPM), Morgan Stanley or Charles Schwab (SCHW). We can also diversify an investment in this sector through ETFs such as the Financial Select Sector SPDR Fund (XLF) or the Vanguard FInancials ETF (VFH).
7. Materials.
The materials sector is another of the fundamentals for the growth of the economy. This sector includes companies that produce materials necessary for the steel industry, agriculture and construction. These materials can range from fertilizers, paper, concrete, metals or plastics.
Market capitalization vs profits and revenues of the US materials sector for the last 5 years. Source: Simply Wall.st.
This sector is cyclical given that it is linked to the global economic situation, as we have been able to observe in the supply chains, the economic slowdown, conflicts over trade agreements (US-China trade war) or wars such as that of the Ukrainian war. Stocks in the materials sector are made up of companies such as Southern Copper (SCCO), Linde (LIN), Freeport-McMoRan (FCX), Ecolab (ECL) or DuPont de Nemours (DD). We can also diversify an investment in this sector through ETFs such as the VanEck Gold Miners (GDX) or the Materials Select Sector SPDR Fund (XLB).
8. Utilities.⚡
The utility sector is made up of shares of companies that provide basic services, such as electricity, natural gas, water and maintenance of public infrastructure. This sector is characterized by being immune to economic cycles since people will always need these services.
Market capitalization vs profits and revenues of the US utility sector for the last 5 years. Source: Simply Wall.st.
In addition, being public service companies regulated by governments, this sector offers stable and predictable returns. Utility sector stocks are made up of companies such as NextEra Energy (NEE), Duke Energy (DUK), Sempra (SRE), Exelon (EXC) or Southern (SO). We can also diversify an investment in this sector through ETFs such as the Utilities Select Sector SPDR Fund (XLU) or the Global X US Infrastructure Development ETF (PAVE).
9. Industrial.️
This sector, the one that led the great Industrial Revolution of the 18th century, is made up of companies that manufacture machinery, tools and industrial products. In turn, aircraft manufacturing, defense, transportation and logistics services companies are also included. The industrial sector has considerable weight in the economies, representing a third of the global economy.
Market capitalization vs profits and income of the US industrial sector for the last 5 years. Source: Simply Wall.st.
This sector is influenced by the development of economies, since when manufacturing elements that are linked to economic growth they may suffer price variations. In turn, recent conflicts in different regions of the world have seen increases in defense investment in the vast majority of countries in the world due to fear of an escalation of conflict on a global scale. The industrial sector stocks are made up of companies such as Union Pacific (UNP), United Parcel Service (UPS), Boeing (BA), Caterpillar (CAT) or GEO Group (GEO). The most popular index in the industrial sector is the Dow Jones Industrial (DJI). We can also diversify an investment in this sector through ETFs such as the iShares US Aerospace & Defense ETF (ITA) or the Industrial Select Sector SPDR Fund (XLI).
10. Telecommunications.️
The telecommunications sector, one of the sectors that is quite linked to the sector that we have explained in point 5 of this investment training. This sector is made up of companies that offer interactive services and media, media, telecommunications services and operators, entertainment and wireless telecommunications.
Market capitalization vs profits and revenues of the US telecommunications sector for the last 5 years. Source: Simply Wall.st.
This sector is quite exposed to the technology sector, given that a large part of the companies that make up the telecommunications sector are also part of the technology sector. Therefore, they can be considered cyclical stocks. Telecommunications sector stocks are made up of companies such as Alphabet (GOOGL), Meta Platforms (META), Netflix (NFLX), Comcast (CMCSA) or Charter Communications (CHTR). We can also diversify an investment in this sector through ETFs such as the Vanguard Communication Services ETF (VOX) or the iShares US Telecommunications ETF (IYZ).
11. Health.⚕️
The last sector that we will explain in this investment training on the main sectors that make up the stock market is healthcare. This sector is made up of healthcare, life sciences, medical equipment, biotechnology, pharmaceutical, and healthcare services companies. As we witnessed two years ago, events such as the coronavirus pandemic increase unusual volatility in this sector. This is because the demand from the health sector is always constant, given that human beings continue to need to take care of their health and develop new cures or palliatives.
Market capitalization vs profits and revenues of the US healthcare sector over the last 5 years. Source: Simply Wall.st.
Therefore, we can consider healthcare sector stocks as defensive, given that they resist changes in economic cycles. Health sector stocks are made up of companies such as Pfizer (PFE), Moderna (MRNA), AbbVie (ABBV), Thermo Fisher Scientific (TMO) or Danaher (RDH). We can also diversify an investment in this sector through ETFs such as the Health Care Select Sector SPDR Fund (XLV) or the iShares Biotechnology ETF (IBB).
Conclusions from this investment training on the main sectors of the stock market.
After finishing this article on investment training in the main stock market sectors, we have learned what type of actions make up each sector that we have been describing, how they can behave according to the current situation of the economy or what each sector is dedicated to. We have also seen that some companies can be part of different sectors, such as technology and telecommunications. In turn, knowing how to categorize each type of action can help us identify the direction that our portfolio could take depending on the type of actions in each sector that we guard.