The S&P 500 is probably the most widely followed index that tracks the performance of large-cap American stocks. According to S&P Dow Jones Indices, which owns and manages the index, nearly US$10 trillion of stocks is indexed or benchmarked to the index, which includes 500 of the largest American publicly traded companies and captures about 80% of the total value of the U.S. stock market.
The 500 stocks in the index are divided into 11 sectors, each of them consisting of companies in the same or related industries. The classification of similar companies into sectors allows investors to buy shares in exchange-traded-funds and mutual funds that invest in individual sectors, thus allowing them to diversify their investment over many companies in the same industry rather than putting all of their money into just one stock.
The division of the 500 stocks into different sectors began in 1999. S&P Dow Jones Indices and MSCI, a leading provider of research-based indexes and analytics, developed the Global Industry Classification Standard (GICS), which seeks "to offer an efficient investment tool to capture the breadth, depth and evolution of industry sectors."
As of September 2018, the S&P 500 was divided into 11 sectors, as follows, with their respective weightings by market capitalisation:
- Communication Services: 9.9%
- Consumer Discretionary: 10.2%
- Consumer Staples: 6.7%
- Energy: 6.0%
- Financials: 13.7%
- Health Care: 14.9%
- Industrials: 9.7%
- Materials: 2.5%
- Real Estate: 2.7%
- Technology: 20.8%
- Utilities: 2.8%
The 2018 Sector Reclassification
On 15 November 2017, S&P Dow Jones Indices and MSCI announced a major restructuring of the sectors in the index, which at the time included 10 sectors. The changes took effect in September 2018.
Since more than 10% of the market cap of the companies in the S&P 500 was re-classified, the changes are considered to be the biggest in GICS history. Most notably, the former Telecommunication Services sector, which was dominated by a handful of large telecom carriers such as AT&T, Verizon and T-Mobile, was renamed Communication Services.
It expanded to include some companies that had previously been in the Consumer Discretionary and Information Technology sectors. Those companies include Facebook, Google parent Alphabet, Netflix, Comcast and Walt Disney. Following the recasting of this sector, it now accounts for about 10% of total stock market capitalisation, compared to only about 2% previously. Likewise, the sector is now more growth-oriented, whereas previously it consisted mostly of value-oriented companies.
Another major change included moving eBay from the former Information Technology sector, which was renamed to Technology, to the Consumer Discretionary category. As a result of these changes, Apple will account for a bigger share of the tech sector, while Amazon will have a bigger weighting in the consumer discretionary category.
Here is a brief description of the types of companies classified into each sector:
As noted, this sector now includes social media and traditional media companies as well as cable, landline and mobile telephone carriers.
This sector consists of businesses whose demand fluctuates based on general economic conditions, such as consumer durables, automobiles, hotels and restaurants, retailers and the like. Companies in this sector include Amazon, General Motors, Hilton and Nike.
Consumer staples generally consist of necessities, such as food and beverages and personal products. This includes producers of these goods as well as retail companies that sell them, such as supermarkets. Examples include Procter & Gamble, Kimberly-Clark, Coca-Cola and Costco.
The energy sector consists of companies that explore, produce and sell oil and gas products as well as companies that supply equipment and services to them. Companies in this sector include Exxon, Chevron and Kinder Morgan.
The financials sector includes commercial banks, insurance companies, consumer lenders, investment firms and the like. Major companies include JPMorgan Chase, Bank of America, Prudential Financial and Discover Financial.
This sector includes pharmaceuticals manufacturers, hospitals, health care equipment and service providers, and biotechnology and life sciences companies. Prominent companies include Pfizer, Bristol-Myers Squibb and United Health.
This sector includes a wide variety of manufacturers and transportation companies, such as defense and aerospace, airlines, railroads, machinery and the like. Major companies include Boeing, General Dynamics, American Airlines, 3M and General Electric.
Industries in this sector include chemicals, construction materials, metals and mining, and paper and forest products. DowDuPont, International Paper and Newmont Mining are a few examples of the bigger companies.
Real Estate Sector
This sector, some of which was previously included in the financials sector, consists of equity real estate investment trusts and real estate management and development firms. Companies include Host Hotels, Simon Property Group and Public Storage.
Tech companies include manufacturers and sellers of computer hardware, software, semiconductors and computer equipment in addition to providers of IT services. Companies include Apple, IBM, Microsoft and Cisco.
This sector includes electric and gas companies, water companies and renewable electricity producers. American Electric Power, Duke Energy, Pacific Gas & Electric and Public Service are among the bigger companies.
The S&P 500 is an index that tracks the 500 largest publicly-traded U.S. companies by market capitalisation, and it's divided into 11 sectors based on the similarity of their businesses. The division into sectors allows investors to buy exchange-traded funds and mutual funds that invest in each sector, allowing diversification over the entire group rather than in just one company. In 2018, the sectors were reclassified to bring them up to date with the major business changes over the past 20 years.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation of Technical Analysts. He is a full member of the Society of Technical Analysts in the United Kingdom and combined with his over 20 years of financial markets experience provides resources of a high standard and quality. Russell analyses the financial markets from both a fundamental and technical view and emphasises prudent risk management and good reward-to-risk ratios when trading.
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