Investors can’t go far without coming across mention of stock sectors. There are more than 50 sector ETFs and more than 200 sector mutual funds that have at least $1 billion in assets, and countless strategies based on sector rotation and leadership. The financial media often highlights the relative performance of the sectors as evidence of some kind of news or trend.
The only problem with all of this is that stock sectors don’t make a whole lot of sense in 2015. Some general similarities exist, but most sectors now include companies with wildly different business models, products, and primary price drivers.
Below is a review of the various stock market sectors, including highlights of some of the specific members of each.
Materials
The materials sector typically includes companies involved in extracting or producing hard assets, such as metals and chemicals. The following companies are included in the Materials SPDR (XLB):
Newmont Mining (NEM) is one of the world’s largest gold miners, maintaining operations on five continents. At the end of 2014, the company reported about 28 million ounces of proven gold reserves along with 54 million ounces of probable gold reserves. In addition, the company had about 297 million pounds of measured copper resources and another 7 billion pounds of indicated copper resources.
The adjacent image shows the Ahafo mining operation in Ghana, where 4,400 employees and contractors work to produce about 442,000 ounces of gold annually.
Sherwin-Williams (SHW), headquartered in Cleveland, is primarily known for its line of paints. In addition to the gallons of paint sold in hardware stores, Sherwin-Williams also produces a number of products for industrial customers such as automotive finishes.
The company also sells tools used for painting such as sandpaper, drop cloths, caulk guns, and sealants. These products, along with various finishes and paint products, are available for purchase at more than 4,000 Sherwin-Williams stores across the country.
The adjacent image shows a Sherwin-Williams store.
Avery Dennison (AVY), founded in Los Angeles in 1935 as Kum Kleen Products, manufactures and distributes adhesive materials and packaging. The company’s most recognized products may be its peel-off name tags (shown in the adjacent image), but Avery Dennison manufactures a wide range of other products including:
- Vehicle wraps;
- Acrylic tapes;
- Wound dressing products; and
- Plastic bottle labels.
The company is headquartered in Glendale, California and has about 25,000 employees.
To recap, the material sector includes gold miners, paint manufacturers, and a name tag company.
Industrials
The industrials sector has become something of a catch-all for stocks that don’t belong elsewhere. In addition to airlines, freight and delivery services, and industrial conglomerates such as General Electric (GE) and 3M (MMM), the Industrials SPDR (XLI) includes the following stocks:
Boeing (BA) manufactures airplanes for commercial and government clients and produces a number of military transport vehicles and defense systems as well.
Below is the Boeing AH-64 Apache helicopter, which features an M230 chain gun and is manufactured to carry a combination of AGM-114 Hellfire missiles and Hydra 70 rocket pods:
Union Pacific (UNP) is one of the largest railroad companies in the world, operating close to 9,000 locomotives over a network of about 32,000 miles.
Below is an image of a GE Dash 8-40C diesel locomotive in use in the early 1990s. This version has since been replaced by the GE Evolution Series of diesel-electric locomotives, which feature a 5,000 gallon fuel capacity and 4,000 horsepower output.
Pitney Bowes (PBI) is also a member of the industrials sector. The company is best known for its postage meters, one of which is shown in the below image. These meters are widely used in offices to process outgoing mail.
In addition to its postage meters, Pitney Bowes provides a number of consulting and data services. Among these are location intelligence services, which includes strategies for designing retail web sites, and customer engagement, which includes advice for building brand loyalty.
Dun & Bradstreet (DNB) can be found along with Boeing and Union Pacific in most industrials ETFs and mutual funds. The company’s operations take place not in factories or manufacturing centers, but in corporate office buildings.
Dun & Bradstreet is best known for its business credit services, powered by a database of information on millions of companies around the world (the image below shows a sample business report).
Other services include sales resource allocation consulting, supply chain optimization, and market-sensing analysis. It isn’t clear what exactly some of these consulting services entails, but it seems unlikely that they are related to the manufacture of military helicopters or diesel locomotives.
In 1996 Dun & Bradstreet spun off ACNielsen, best known for its television rating services, into a separate company.
To recap, the industrial sector includes railroads, military helicopter manufacturers, and companies that sell postage meters. Oh, and a business credit reporting service.
Consumer Discretionary
The consumer discretionary sector generally includes companies that produce goods or provide services deemed to be purchased with discretionary income. This broad classification includes a wide range of companies with very unique business models and price points.
The chart below shows five stocks included in Consumer Discretionary SPDR (XLY):
While the stocks listed above may be driven by some of the same macroeconomic factors, other similarities will be hard to find. Michael Kors sells $300 handbags while Dollar General sells tubs of coffee for $9. H&R Block and Netflix don’t have any products available for purchase, while Amazon sells about 323 million different products (but doesn’t have a single retail location). Yet all are included in the consumer discretionary sector.
Consumer Staples
The Consumer Staples SPDR (XLP) is a hodgepodge of food and drink items and household products. The image below highlights the products of six companies that are included in this sector:
Whole Foods (WFM), Clorox (CLX), Molson Coors (TAP), Philip Morris (PM), Campbell’s Soup (CPB), and Estee Lauder (EL) are components of the Consumer Staples ETF.
At the very highest of levels, all of these companies will be impacted by the level of consumer spending. But the products sold by companies in this sector — such as soup, makeup, cigarettes, and bleach — are hardly homogeneous.
And yes, Whole Foods is in the Consumer Staples ETF while Dollar General is in the Consumer Discretionary ETF.
Financials
The financials sector may seem at first glance to be relatively uniform; many of the components are banks and insurance companies. But the inclusion of REITs in this sector throws a wrench into the classification. Below are profiles of three companies that are included in the Financials SPDR (XLF):
Goldman Sachs (GS) is one of the largest investment banks in the country. Founded in 1869, the company made a name for itself when it completed the initial public offering for Sears, Roebuck and Company in 1906. Since then it has evolved and grown into one of the largest banking institutions in the world providing a wide range of financial services.
In 2014, Goldman Sachs paid nearly $12.7 billion in salaries to its 34,000 employees — reflecting an average of about $373,000 per employee.
The adjacent image shows the Goldman Sachs headquarters in Jersey City.
Image Source: Public Storage.
Public Storage (PS) operates more than 2,000 self storage facilities around the country. PS develops multi-unit storage facilities, and generates revenue by renting out the units to individuals and companies. The rental centers are located in both urban and rural areas in more than 35 states. There are also nearly 200 units in seven different European countries.
The company also sells miscellaneous moving and packing supplies such as cardboard boxes, packing tape, and storage locks.
The adjacent photo, taken from the Public Storage web site, shows one of the company’s storage centers.
Image Source: Plum Creek Timber Company
Plum Creek Timber Company (PCL) operates more than six million acres of working forests across the U.S., including 888,000 acres in Montana and 711,000 acres in Arkansas (the company doesn’t own any land in New York, California, or Illinois).
Plum Creek also operates a Montana-based wood products division that produces lumber, plywood, and fiberboard used in various applications. The adjacent photo, taken from the company’s web site, shows a Plum Creek employee at work in one of the active forests.
To recap, the financial sector includes Wall Street investment banks, timber companies, and self storage facilities (as well as a number of insurance companies).
Health Care
Perhaps no sector is as diverse in 2015 as health care. Included here are hospital operators and drug manufacturers, as well as companies that are developing advanced medicines and treatments — and those that distribute bedpans.
Below is a sampling of the holdings of the Health Care SPDR (XLV):
Technology
Like health care, the tech sector has evolved to include companies producing a wide range of products and services. Apple (AAPL) and Facebook (FB), two of the largest tech companies, have very few operational similarities. One produces consumer electronics while the other produces lines of code:
Other components of the Technology SPDR (XLK) include:
So Long, Sectors
A couple sectors still generally make sense as a way to classify stocks; the components of the Energy SPDR (XLE) are impacted by the price of oil while the Utilities SPDR (XLU) holds companies that deliver electricity and gas. But most of the others have become less meaningful as the global economy has evolved and the lines between them have blurred.
The display of absolute and relative sector performance data will likely continue for some time. But, as is often the case in investing and life, what lies beneath the label is anything but clean and orderly. Take any sector data or suggestions with a grain of salt.
This article, The Truth About Stock Sectors, first appeared on Dividend Reference.