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An Introduction

There are over 5,000 publicly traded stocks listed on major U.S. exchanges but there is a classification system that separates the stock market into 11 sectors representing key areas of the economy to help you build a diversified portfolio and mitigate risk. With so many stocks actively trading in 11 different sectors, choosing the right one to buy today can be a challenge.

With this in mind, let’s take a look at the 11 sector classifications in the order from largest to smallest sector share, what each sector is about, its current price-earnings ratio, and the YTD performance of the Vanguard ETF, as an example, in each sector (I do not own any Vanguard ETFs): 

1. Information Technology

   • The information technology sector includes companies that make software, build IT equipment and hardware, implement technological solutions, and produce semiconductor chips. Some of the companies in this sector also make communications equipment such as mobile phones and laptops.
   • Sector Share: 27.1%
   • Current P/E Ratio: 42.8
   • Sector Price Change YTD: UP 19.4% (as per the Vanguard Information Technology ETF -VGT)

2. Health Care

   • Companies in the healthcare sector provide medical services, make medical equipment, research and produce pharmaceuticals, sell health insurance, and otherwise facilitate health care for individuals.
   • Sector Share: 14.4%
   • Current P/E Ratio: 24.3
   • Sector Price Change YTD: UP 6.5% (as per the Vanguard Healthcare ETF - VHT)

3. Financials

   • Businesses in this sector provide financial services to commercial and retail customers. Generally, that includes brokerage firms along with companies involved in banking, money markets, mortgages, investing, and insurance. Stocks in the financial sector may perform well when rates on loans rise. Lower loan demand, however, may weigh on earning potential. 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.
   • Sector Share: 11.2%
   • Current P/E Ratio: 14.8
   • Sector Price Change YTD: UP 8.2% (as per the Vanguard Financials ETF - VFH)

4. Consumer Discretionary 

   • Companies within this sector market their products and services to consumers, who in turn buy these goods with discretionary income. Some of the businesses in this sector are in retail, travel, automobiles, restaurants, and luxury goods, to name a few. The fortunes of many of these companies rise and fall with the economy because they depend on consumers having extra cash to spend. 
   • Sector Share: 10.9%
   • Current P/E Ratio: 28.9
   • Sector Price Change YTD: UP 3.6% (as per the Vanguard Consumer Discretionary ETF - VCR)
5. Communication Services
   • Communication Services encompasses two major categories: telecommunications services, and entertainment and media. The telecommunication services end consists of companies that provide wireless, fiber-optic, cable, and internet services while the entertainment and media category consists of companies that engage in broadcasting, entertainment, streaming services, social media, and more.
   • Sector Share: 8.9%
   • Current P/E Ratio: 22.9
   • Sector Price Change YTD: UP 18.5% (as per the Vanguard Communication Services - VOX)

6. 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. 
   • Sector Share: 7.8%
   • Current P/E Ratio: 24.8
   • Sector Price Change YTD: UP 6.8% (as per the Vanguard Industrials ETF - VIS)

7. Consumer Staples

   • Companies within the consumer staples sector make goods that are always needed, such as food, beverages, and household and personal-care products and retail companies that specialize in selling these goods, such as grocery stores. In general, these companies are defensive plays and are able to maintain stable growth regardless of the broader state of the economy.
   • Sector Share: 6.5%
   • Current P/E Ratio: 26.2
   • Sector Price Change YTD: UP 7.6% (as per the Vanguard Consumer Staples - VDC)

8. Energy

   • The energy sector is made up of companies that explore, produce, and store fuels such as oil, natural gas, and coal 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. 
   • Sector Share: 4.8%
   • Current P/E Ratio: 8.2
   • Sector Price Change YTD: UP 8.9% (as per the Vanguard Energy ETF - VDE)

9. Utilities

   • The utilities sector includes businesses that deliver electricity, gas, and water to consumers 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.
   • Sector Share: 3.0%
   • Current P/E Ratio: 21.4
   • Sector Price Change YTD: UP 9.6% (as per the Vanguard Utilities - VPU)

10. Real Estate

    • Companies in the real estate sector are involved in developing and managing 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.
    • Sector Share: 2.8%
    • Current P/E Ratio: 21.1
    • Sector Price Change YTD: DOWN 5.2% (as per the Vanguard Global Real Estate ETF - VNQ)

11. Materials 

    • This sector includes companies that take raw materials or natural resources and turn them into something more usable. Companies that produce chemicals, construction materials, packaging, glass, paper, metals, and more are involved in this sector. Stocks here often do well when the economy is growing, and they're influenced by inflation and changes in the U.S. dollar so, 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.
    • Sector Share: 2.8%
    • Current P/E Ratio: 15.1
    • Sector Price Change YTD: UP 1.8% (as per the Vanguard Materials ETF - VAW)

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