How to Diversify Your Portfolio Across Stock Market Sectors

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To the uninitiated, “investing in the stock market” might sound pretty straightforward. But the closer you look, the more complex it becomes. You can choose from multiple exchanges and brokerage platforms to invest in. One of the best ways to achieve a balanced portfolio is to invest in multiple stock market sectors.

What Are Sectors in the Stock Market?

Sectors are groupings of similar types of companies with similar characteristics — technology equipment producers, healthcare, energy companies, etc.

Sector classifications are based on the Global Industry Classification Standard (GICS). Morgan Stanley Capital International (MSCI) and Standard & Poor’s developed the GICS in 1999.

The GICS also divides sectors into smaller categories: industry groups, industries and sub-industries. When you’re developing a portfolio, you don’t need to be overwhelmed by these categories. Focus on sectors first.

11 Sectors of the Stock Market

The stock market is divided into 11 sectors.

1. Financials Sector

Companies involved in finance include:

• Insurance companies
• Investment banks
• Brokerage firms
• Mortgage companies
• Consumer financing companies

Investing in financials is usually profitable, but changing interest rates can increase volatility. Some of the biggest stocks in this sector include Visa and JPMorgan Chase & Co.

2. Healthcare Sector

Healthcare providers and corporations involved in healthcare technology, pharmaceutical companies and biotech research firms make up this sector. 

The healthcare sector tends to perform better during recessions than other sectors, and investing in the right up-and-coming companies can lead to impressive returns. Some of the most prominent stocks include Universal Health Services and Eli Lilly and Company.

3. Consumer Staples Sector

This sector includes companies involved with everyday essentials — food, drinks, cleaning supplies and paper goods. It includes companies that manufacture and sell staple goods. 

This sector tends to perform well even during recessions. Some of the top stocks are Walmart and Coca-Cola.

4. Energy Sector

This energy sector includes companies that find, obtain and refine oil and gas. It tends to be a safe sector for investors, and returns are generally modest. Some of the major energy stocks are ExxonMobil and Chevron Corp.

5. Industrial Sector

When the economy is booming, investing in the industrial sector can be a great choice. This sector includes companies across several industries:

• Aerospace and defense product manufacturing
• Transportation services
• Professional services
• Electrical and construction equipment manufacturing

Some of the biggest stocks in this sector are the United Postal Service and Honeywell International Inc.

6. Materials Sector

The materials sector includes companies that produce a range of essential raw materials:

• Lumber
• Metal
• Chemicals
• Glass
• Packaging materials
• Paper
• Paint

Because people will need raw materials, this sector is relatively stable and usually offers modest returns. Some of the best stocks in this sector are Arch Resources Inc. and BHP Group Ltd.

7. Communication Services Sector

This sector continues to grow as more people spend time online. It includes social media platforms, mobile companies and entertainment companies. Investing early in rising companies can prove to be profitable. Major stocks include Verizon and Meta Platforms.

8. Consumer Discretionary Sector

The consumer discretionary sector is a broad sector that includes retail stores, restaurants and hotels. It also includes companies that make clothing, cars and non-essential products.

This sector’s performance often depends on the current state of the economy. When people have more income for discretionary spending, they’re likely to see better returns. But during economic downturns, this sector doesn’t perform as well. Some of the major stocks in the sector are Amazon and Toyota.

9. Real Estate Sector

Real estate almost always steadily grows, so if you want a dependable investment, it can be a good sector to look at. It includes real estate developers and other companies related to real estate. Some of its biggest stocks are Simon Property Group and American Tower Corp.

10. Utilities Sector

Gas, water, and electricity are essential to individuals and companies. Because the utilities sector provides these things, it tends to be a smart investment with steady returns. Some of the major players include Dominion Energy and Duke Energy.

Generally speaking, the utilities sector isn’t a growth sector. However, newer “green” energy technologies have the potential to deliver higher returns. Keep in mind that investing in these companies comes with higher risk.

11. Information Technology Sector

This fast-growing sector includes software companies and companies that make cell phones, computers and similar types of hardware. Two of the best-known companies in the sector include Apple and Microsoft.

Importance of Diversifying Across Sectors

There’s no such thing as a risk-free investment. But successful investors are able to mitigate risks to minimize their chances of loss and maximize their chances of growth.

One of the best risk management strategies is diversification.

Diversification can be achieved in several ways. It might include using different investment vehicles or investing in companies in various geographical areas. And it also might look like investing across multiple sectors.

Here’s an example of why it’s so important to invest in different sectors. Suppose that you invest only in the industrial sector. This is a sector that does very well when the economy is booming, but it lags when the economy is in a slump. 

If an economic downturn hits, you might find yourself facing significant losses. But suppose that you’ve also invested in the consumer staples sector. Because people will continue to buy essentials, this is a sector that tends to do well even when the economy slows. You’ll probably see returns here that offset your losses from the industrial sector.

This is diversification across only two stock market sectors. If you divide your investments across all 11 sectors, you’ll be poised to see returns and offset losses no matter what direction the economy takes.

Invest in Stock Market Sectors with Benzinga’s Best Brokers

It takes more than luck to create a stable, durable investment portfolio. If you want to optimize your investing potential, you need to find the right broker. Here are some recommended brokers.

Build a Stable, Multi-Sector Portfolio

When you have a better understanding of the 11 stock market sectors, you’ll be better equipped to diversify your portfolio. Investing in several sectors sets you up for success — when one sector or asset class isn’t performing well, you’ll likely see returns in other areas.

Creating a stable portfolio isn’t always intuitive, but with the help of investing guides, articles and expert advice, you can create a strong portfolio or improve your existing one.

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