What Is the Global Industry Classification Standard (GICS)?

What Is the Global Industry Classification Standard (GICS)?

Let me explain to you what the Global Industry Classification Standard (GICS) is—it's a straightforward method for assigning companies to a specific economic sector and industry group that best matches their business operations. This system stands as one of two main rivals used by investors, analysts, and economists to compare competing companies.

GICS came about through a joint effort by Morgan Stanley Capital International (MSCI) and Standard & Poor's. You'll find the GICS methodology applied in MSCI indexes, which cover U.S. and international stocks, and it's adopted by a significant part of the professional investment management community.

Key Takeaways

GICS systematically identifies every company by sector, industry group, industry, and sub-industry. Investors and analysts rely on it to spot, compare, and contrast a firm's competitors. The classification system has four levels—as of 2021, that means 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

Understanding GICS

You need to know that a company's industry classification is crucial if you're an investor aiming to build a diversified portfolio or to pinpoint competitors in the same field. At the top of the GICS hierarchy, there are 11 economic sectors, which break down into 24 industry groups, then 68 industries, and finally 157 sub-industries. Each stock gets a code that identifies it across all four levels.

Companies receive their GICS classification codes at the sub-industry level from Standard & Poor's and MSCI, based on their definition of the company's principal business. Remember, the main source of revenue is the key factor in determining that principal activity, though earnings analysis and market perception also play a role.

Since GICS started in 1999, revisions have come along to add, delete, or refine industry groups, sub-industries, and industries. For instance, a real estate sector was added in 2016, and the telecommunications sector got renamed to communication services in 2018, expanding to include some media, entertainment, and interactive services from other sectors.

How GICS Is Used

In total, over 26,000 stocks worldwide fall under GICS classification, covering more than 95% of the world's listed market capitalization. Portfolio managers use it to identify and analyze stocks and their competitors. It also serves for benchmarking MSCI indexes—Morgan Stanley estimates that more than $14.5 trillion in assets under management are tied to these indexes, many of which focus on specific sectors.

GICS competes directly with the Industry Classification Benchmark (ICB) system, maintained by Dow Jones and London's FTSE Group.

The ICB and GICS Systems Are Not Really All that Different

The biggest difference between ICB and GICS shows up in how consumer businesses get classified at the sector level. With ICB, companies dealing with consumers split into providers of goods and services. Under GICS, they're labeled as cyclical or noncyclical, or between discretionary spending and staples.

At lower levels, differences exist but aren't hugely impactful—for example, coal companies sit in basic materials under ICB but in energy under GICS. Whether one system is better comes down to preference, and as an end-user, you don't get much choice since major indexes align their stocks with one or the other. In practice, most sector and industry designations overlap between GICS and ICB.

Is Classification Out of Date?

Lately, questions have arisen about the relevance of GICS and ICB classifications. Many current economic categories stem from the Industrial Age, when dominant companies were massive with physical plants and tangible products.

Today's corporate giants blur lines between hardware, software, and more—think Apple making phones, computers, and selling entertainment, or Amazon creating hardware, producing programming, selling cloud services, and delivering goods. General Electric even has stakes in NBC, Telemundo, and Universal Pictures.

Critics say it's time to shift from a vertical industry focus to one based on business models, updating the Global Industry Classification Standard to capture the broader scope of modern corporations. This would give investors, customers, and employees better tools to navigate new strategic landscapes.