The stock market is often divided into 11 major sectors representing key areas of the economy. Within each sector, there are a number of different publicly traded companies that share the same broad focus. Investors interested in gaining exposure to a specific area of the economy, or implementing a sector-rotation strategy to position their portfolio, may want to consider exchange-traded funds (ETFs) in the sector of their choice.
In this article, we’ll take a look at the 11 sectors of the stock market and various ETFs that can be used to gain exposure to them.
The financial sector consists of banks, investment funds, insurance companies and real estate firms, among others. In general, the majority of the revenue generated by the sector comes from mortgages and loans that gain value as interest rates rise.
The most popular financial ETFs include:
The utilities sector consists of electric, gas and water companies as well as integrated providers. In general, the sector generates consistent recurring income by charging consumers and businesses that provide higher-than-average dividend yields.
The most popular utilities ETFs include:
- Utilities Select Sector SPDR (XLU )
- Vanguard Utilities ETF (VPU )
- iShares Global Infrastructure ETF (IGF )
3. Consumer Discretionary
The consumer discretionary sector consists of retailers, media companies, consumer service providers, apparel companies and consumer durables. In general, these companies benefit from an improving economy when consumer spending accelerates.
The most popular consumer discretionary ETFs include:
- Consumer Discretionary Select Sector SPDR (XLY )
- Consumer Discretionary AlphaDEX Fund (FDX)
- Vanguard Consumer Discretion ETF (VCR )
4. Consumer Staples
The consumer staples sector consists of food and beverage companies as well as companies that create products consumers are unwilling to cut from their budgets. In general, these companies are defensive plays capable of withstanding an economic downturn.
The most popular consumer staples ETFs include:
- Consumer Staples Select Sector SPDR (XLP )
- Consumer Staples AlphaDEX Fund (FXG )
- Vanguard Consumer Staples ETF (VDC )
The energy sector consists of oil and gas exploration and production companies, as well as integrated power firms, refineries and other operations. In general, these companies generate revenue that’s tied to the price of crude oil, natural gas and other commodities.
The most popular energy ETFs include:
The healthcare sector consists of biotechnology companies, hospital management firms, medical device manufacturers and many others. In general, the sector is considered to be both a growth opportunity and defensive play since people will always require medical aid.
The most popular healthcare ETFs include:
- Health Care Select Sector SPDR (XLV )
- Nasdaq Biotechnology ETF (IBB )
- Vanguard Health Care ETF (VHT )
The industrial sector consists of aerospace, defense, machinery, construction, fabrication and manufacturing companies. In general, the industry’s growth is driven by demand for building construction and manufactured products like agricultural equipment.
The most popular industrial ETFs include:
- Industrial Select Sector SPDR (XLI )
- Vanguard Industrials ETF (VIS )
- iShares Transportation Average ETF (IYT )
The technology sector consists of electronics manufacturers, software developers and information technology firms. In general, these businesses are driven by upgrade cycles and the general health of the economy, although growth has been robust over the years.
The most popular technology ETFs include:
- Technology Select Sector SPDR (XLK )
- Vanguard Information Tech ETF (VGT )
- DJ Internet Index Fund (FDN )
The telecom sector consists of wireless providers, cable companies, internet service providers and satellite companies, among others. In general, these companies generate recurring revenue from consumers, but some subsets of the industry are facing rapid change.
The most popular telecom ETFs include:
- Vanguard Telecom ETF (VOX )
- iShares US Telecommunications ETF (IYZ )
- iShares Global Telecom ETF (IXP )
The materials sector consists of mining, refining, chemical, forestry and related companies that are focused on discovering and developing raw materials. Since these companies are at the beginning of the supply chain, they are vulnerable to changes in the business cycle.
The most popular materials ETFs include:
- Market Vectors TR Gold Miners (GDX )
- Materials Select Sector SPDR (XLB )
- iShares U.S. Home Construction ETF (ITB )
11. Real Estate
The real estate sector consists of companies invested in residential, industrial, and retail real estate. The main source of revenue for these companies comes from rent income and real estate capital appreciation. As a result, this sector is sensitive to interest rate changes.
The most popular real estate ETFs include:
- Vanguard REIT ETF (VNQ )
- Vanguard Global ex-U.S. Real Estate Index Fund ETF (VNQI )
- Schwab US REIT ETF (SCHH )
The Bottom Line
The stock market is often divided into eleven sectors, with each sector having unique dynamics affecting its profitability. Investors looking to build exposure to specific sectors can use any number of ETFs to achieve their asset allocation goals.