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What Are ETFs & Why Should Investors Consider Them?
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 stocks that operate in the same broad area. If you’re an investor and want to diversify your portfolio expansively, you’ll then need to own companies across the market.
In light of that, it’s helpful to know the market categorization for each sector. For instance, if you want to have exposure in specific areas of the economy, an exchange-traded fund (ETF) may be a good place to start. But first, what exactly is an ETF? An ETF is a basket of securities, shares of which are sold on the stock exchange. It has become incredibly popular for both active and passive investors alike.
With this in mind, let’s take a look at the 11 sector classifications in the order from largest to smallest. In brief, we will see what each sector is about and a few of the largest ETFs that can be used to gain exposure to that particular industry.
1. Technology
The technology sector consists of businesses revolving around the manufacturing of electronics, software developers, or products and services that are related to information technology. In general, these businesses are driven by upgrade cycles and the general health of the economy, although growth has been robust over the years. To point out, the technology sector is often considered one of the most attractive places to find growth in the stock market.
2. Health Care
An investment in health care is exciting. When you invest in the health care sector, you’re actually investing in a broad range of industries. That’s because the 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 require medical aid in both good and bad times. Since it’s the second-largest industry, it’s nearly impossible to have a diversified portfolio without any health care stocks or ETFs in it.
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3. Financials
The financial sector is made up of firms and institutions that provide financial services to both corporate and individual customers. This sector consists of banks, investment funds, and insurance companies, among others. By and large, the majority of the revenue generated by the sector comes from mortgages and loans. Thus, such revenue increases as interest rates rise. The overall health of the economy depends on the strength of its financial sector. In view of the economy rebounding, it may not be a bad idea to have some exposure to some of the financial ETFs below.
4. Real Estate
The real estate sector consists of companies invested in residential, industrial, and retail real estate. Accordingly, the main source of revenue for these companies comes from rent income and real estate capital appreciation. As the economy continues to rebound, there would undoubtedly be opportunities in the real estate sector. Investors love the sector because of its ability to generate healthy dividends along with capital appreciation.
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5. Energy
The energy sector is a category of companies in the business related to the production and supply of energy. 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. But with the U.S. making combating climate change one of its top priorities, clean energy ETFs have also gained the attention of investors.
6. Materials
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, it’s natural that their activities tend to move along with the economic cycles. Hence, if you think that the economic recovery is well underway, it doesn’t hurt to have some exposure to this cyclical area of the economy.
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7. Consumer Discretionary
Consumer discretionary is a term to describe goods and services that are deemed non-essential by consumers. To list, this sector consists of retailers, apparel companies, media companies, consumer durables, and consumer service providers. These companies usually benefit from consumers that have extra disposable income to spend, and they may therefore receive a boost with an improving economy.
8. Industrials
The industrials sector consists of construction, machinery, fabrication, manufacturing, defense, and aerospace companies. This industry’s growth is driven by demand for building construction and manufactured products such as agricultural equipment. As a result, the performance of these companies in the industrial sector often moves along with the economic cycles.
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9. Utilities
The utility sector consists of electric, gas, and water companies as well as integrated providers. In general, many investors treat utilities as long-term holdings and invest in the sector to generate a steady income for their portfolios. It is arguably the most defensive play you can find in the stock market when there is an economic downturn.
10. Consumer Staples
The consumer staples sector consists of food and beverage companies as well as companies that create products consumers deemed essential for everyday use. In general, these companies are defensive plays and are able to maintain stable growth regardless of the broader state of the economy.
11. Telecommunication
The telecommunication services sector features cable companies, internet service providers, wireless providers, satellite companies, and many more. Consumers are generally providing recurring revenue for these companies, but some subsets of the industry face rapid change. Investing in individual telecom stocks may present higher volatility, but the telecom sector overall has exhibited reasonable long-term growth.
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