Welcome to 2024! It’s a new year, and for a person like myself, with a new year comes another year of exciting investing and money management. While I wish I could say the new year means a new me, it really doesn’t, since my money management principles and investing philosophy will remain exactly the same as previous years: buy and hold quality companies and watch them grow over time (okay I admittedly do some option hedging and profit speculative trading, but it’s blanketed with a high level of risk management – and I do not go around touting this strategy for everyone else’s long term value investing strategy!).
I thought it would be a good way to start off the new year by looking at the basics of investing, and focusing more on the components of the market itself, and how that plays into diversification.
Investing in the stock markets is a difficult task to do. Not only should you understand what you are buying, but you also should remain diversified across your portfolio. Diversification should mean having exposure across the entire market, which indirectly means exposure to all market sectors. There are many market sectors that companies are classified under. They vary in size, focus, service and product offering, historical market performance, and quality. Some investors decide to remain focused within a particular sector in the hopes for outperformance compared to other sectors or the rest of the market, while others look for managing risk during different points in economic cycles.
There are 11 stock market sectors under the Global Industry Classification System (GICS) taxonomy that companies are classified under in the S&P 500 (these 11 sectors are further broken down into 24 industry groups, 68 industries, and 157 sub-industries… but we can dive deeper into those in a future lesson). Let’s walk through each of the market sectors to understand what they represent, the key companies that reside under each sector, historical performance relative to the S&P 500, and ETFs that track each particular sector. Note that most ETFs will pay out a dividend yield, but these cash distributions are not included in the historical performance numbers.
Communication Services
Description: This sector includes companies that provide communication and media services. Investors may find this sector attractive due to the increasing demand for communication and entertainment services in the 21st century (i.e. the emergence of social media), and the ever-increasing role that this sectors plays in the AI space. This sector also tends to overlap with the Information Technologies sector.
Key Companies: Meta, Inc. (META), Alphabet Inc. (GOOGL), Verizon Communications Inc. (VZ)
ETFs:
Communication Services Select Sector SPDR Fund (XLC)
Vanguard Communication Services ETF (VOX)
iShares Global Communication ETF (IXP)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 72%
Consumer Discretionary
Description: This sector includes companies that provide non-essential goods and services, such as retail, automotive, entertainment, and luxury goods. Investors may be attracted to this sector during periods of economic expansion as consumer spending tends to increase during this time.
Key Companies: Amazon.com Inc. (AMZN), The Walt Disney Company (DIS), Tesla Inc. (TSLA)
ETFs:
Consumer Discretionary Select Sector SPDR Fund (XLY)
Vanguard Consumer Discretionary ETF (VCR)
iShares U.S. Consumer Discretionary ETF (IYC)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 201%
Consumer Staples
Description: Consumer Staples include companies that produce and sell essential everyday products. Investors may be attracted to this sector for its defensive characteristics, as demand for these products tends to remain stable even during economic downturns.
Key Companies: Procter & Gamble Co. (PG), The Coca-Cola Company (KO), Walmart Inc. (WMT)
ETFs:
Consumer Staples Select Sector SPDR Fund (XLP)
Vanguard Consumer Staples ETF (VDC)
iShares U.S. Consumer Goods ETF (IYK)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 118%
Energy
Description: Energy includes companies involved in the exploration, production, and distribution of energy. Investors may find this sector attractive due to its potential for profit from fluctuating energy prices, and attractive “utility-like” stable dividend yield that many companies in this sector offer.
Key Companies: Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), ConocoPhillips (COP)
ETFs:
Energy Select Sector SPDR Fund (XLE)
Vanguard Energy ETF (VDE)
iShares U.S. Energy ETF (IYE)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 40%
Financials
Description: Financials consist of banks, insurance companies, real estate, and other financial services. Investors may find this sector attractive due to the potential for profit from interest rates, economic growth, and financial stability, as well as steady dividend yields that bank stocks typically offer.
Key Companies: JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), Wells Fargo & Co. (WFC)
ETFs:
Financial Select Sector SPDR Fund (XLF)
Vanguard Financials ETF (VFH)
iShares U.S. Financials ETF (IYF)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 158%
Health Care
Description: This sector includes companies in the healthcare industry, including pharmaceuticals, biotechnology, medical equipment, and healthcare services. Investors may be attracted to its defensive characteristics and potential for long-term stable growth.
Key Companies: Johnson & Johnson (JNJ), Pfizer Inc. (PFE), UnitedHealth Group Incorporated (UNH)
ETFs:
Health Care Select Sector SPDR Fund (XLV)
Vanguard Health Care ETF (VHT)
iShares U.S. Healthcare ETF (IYH)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 189%
Industrials
Description: Industrials consist of companies involved in manufacturing, construction, aerospace, defense, and transportation. Investors may find this sector appealing during periods of economic growth and infrastructure development.
Key Companies: Boeing Co. (BA), General Electric Company (GE), 3M Company (MMM)
ETFs:
Industrial Select Sector SPDR Fund (XLI)
Vanguard Industrials ETF (VIS)
iShares U.S. Industrials ETF (IYJ)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 164%
Information Technology (IT)
Description: This sector encompasses companies involved in the development and production of technology products and services. Investors may find it attractive due to the potential for innovation, high growth, and the increasing reliance on technology in various industries, especially in the semiconductor, chip manufacturing, and AI space.
Key Companies: Apple Inc. (AAPL), Microsoft Corporation (MSFT), Alphabet Inc. (GOOGL), Nvidia (NVDA)
ETFs:
Technology Select Sector SPDR Fund (XLK)
Vanguard Information Technology ETF (VGT)
iShares U.S. Technology ETF (IYW)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 517%
Materials
Description: Materials consist of companies involved in the extraction, processing, and distribution of raw materials and chemicals. Investors may find this sector attractive during periods of economic expansion and infrastructure development.
Key Companies: Ecolab Inc. (ECL), DuPont de Nemours, Inc. (DD), Freeport-McMoRan Inc. (FCX)
ETFs:
Materials Select Sector SPDR Fund (XLB)
Vanguard Materials ETF (VAW)
iShares U.S. Basic Materials ETF (IYM)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 127%
Real Estate
Description: Real Estate includes companies involved in the ownership, development, and operation of real estate. Investors may find this sector appealing for its potential income through dividends and its historical resilience in inflationary environments, which tends to correlate to strong housing demand and growing new build construction. Many real estate companies offer attractive dividend yields, including Real Estate Investment Trusts (REIT) who are subject to paying out 90% of their net income in the form of a dividend to shareholders.
Key Companies: American Tower Corporation (AMT), Simon Property Group, Inc. (SPG), Prologis, Inc. (PLD)
ETFs:
Real Estate Select Sector SPDR Fund (XLRE)
Vanguard Real Estate ETF (VNQ)
iShares U.S. Real Estate ETF (IYR)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 103%
Utilities
Description: Utilities consist of companies providing essential services like water, electricity, and natural gas. Investors may find this sector attractive for its defensive characteristics during market downturns, and stable dividends offering consistent cash flow to investors.
Key Companies: NextEra Energy, Inc. (NEE), Duke Energy Corporation (DUK), Dominion Energy, Inc. (D)
ETFs:
Utilities Select Sector SPDR Fund (XLU)
Vanguard Utilities ETF (VPU)
iShares U.S. Utilities ETF (IDU)
10 Year Historical Performance (Jan. 1, 2014 to Jan. 26, 2024): 132%
Table 1: S&P 500 Market Sector Historical Performance Comparison (Jan. 1 2014 to Jan. 26 2024)
Although it may seem obvious which sectors to invest in and which ones to avoid based on the table above, it's important for investors to conduct thorough research and consider their investment goals, risk tolerance, and market conditions before making investment decisions. ETFs can provide diversified exposure to specific sectors, offering a more convenient way for investors to gain exposure to a particular industry as opposed to buying specific companies within each sector to achieve the same level of diversification.
Enjoy the start of 2024 and continue to enjoy the long and fruitful investment journey!