What Is a Sector Breakdown?
Let me explain what a sector breakdown is: it's the distribution of your portfolio's investments across various industry sectors, expressed as percentages to help you understand your asset allocation and diversification.
You see, a sector breakdown shows the mix of industry sectors in a fund or portfolio, such as technology or healthcare, and these designations can vary based on the fund's investment criteria and objectives.
Key Takeaways
The sector breakdown of your portfolio directly shows how much of your asset weights are allocated to specific industry sectors.
Sectors are broad classifications like consumer staples, healthcare, or technology.
If you're aiming for a well-diversified portfolio, you should include investments in multiple sectors.
Sector Investing
A sector breakdown allows you to observe the investment allocations of a fund clearly.
Fund companies often include sector reporting in their marketing materials, and this can influence your decisions on investing in the fund.
Some funds target a specific sector, like technology, while others aim to diversify across many sectors.
Be aware that certain funds have restraints on sector investments, especially those focused on environmental, social, and governance (ESG) criteria, which exclude industries like tobacco or oil exploration that investors might find undesirable.
Important Note on Sector Funds
Remember, a sector fund allocates 100% of its investments to a specified sector, such as healthcare, technology, or energy.
GICS
The Global Industry Classification Standard, or GICS, is the primary standard for defining sector classifications in the financial industry.
Developed by MSCI and S&P Dow Jones, GICS starts with 11 sectors and breaks down further into 25 industry groups, 74 industries, and 163 sub-industries.
It uses a coding system to assign codes from each level to every publicly traded company.
The 11 Sectors Defined by GICS
- Energy
- Materials
- Industrials
- Consumer Discretionary
- Consumer Staples
- Health Care
- Financials
- Information Technology
- Telecommunication Services
- Utilities
- Real Estate
Diversification
In a diversified stock portfolio, you'll hold stocks across most GICS sectors to mitigate idiosyncratic or unsystematic risks from factors affecting specific industries or companies.
You can use sector indexes if you're looking to invest in the growth prospects of a single sector.
Investment companies provide passive index funds that replicate each of the 11 GICS sectors, like the Vanguard Information Technology Index Fund, which mirrors the MSCI US Investable Market Information Technology 25/50 Index.
What Is the Five Percent Rule?
For a well-diversified portfolio, include as many sectors as possible without concentrating too much in one or related sectors.
You can apply the five percent rule with sector funds: to diversify in specialty sectors like biotech, commercial real estate, or gold miners, keep your allocation to 5% or less for each.
What Industries Are Included in the Energy Sector?
The Energy Sector covers companies involved in oil, gas, coal, and consumable fuels through exploration, production, refining, marketing, storage, and transportation.
It also includes firms offering oil and gas equipment and services.
How Are Companies Classified Under GICS?
Every company gets a GICS classification at the sub-industry level based on its primary business activity.
MSCI and S&P Dow Jones Indices determine this using revenues and earnings to identify the principal business.
The Bottom Line
Sectors are broad classifications like consumer staples, healthcare, or technology, and the Global Industry Classification Standard defines them as the primary financial industry standard.
Your portfolio's sector breakdown shows asset weight allocations to these sectors, typically expressed as percentages.
