S&P 500 sectors by size

Disclaimer

The S&P 500 is the most widely used index for the US equity market as it measures the stock performance of the 500 largest companies by market capitalization listed on stock exchanges in the United States.

S&P Dow Jones Indices

The S&P 500 index is segmented by eleven sectors, from information technology to energy. The stock performance of the industries measures the performance of each sector.

Figure 1 below shows the S&P 500 sectors and industries by size as of July 31, 2020.

Most investors, academics, and asset managers use the S&P 500 index as their main benchmark to measure an investment portfolio’s performance. S&P 500 index is commonly referred to as “the market.” S&P 500 index, in general, produces an average 10% annual rate of return. An investor or asset manager is considered successful when they can outperform the S&P 500 index consistently for a long time.

Warren Buffet’s Berkshire Hathaway has outperformed the S&P 500 index for a long period of time and made him the most successful investor of all time. Berkshire Hathaway was started as a struggling textile manufacturer. But after wide diversification with a 20% annual return for more than 66 years, Berkshire Hathaway has a market capitalization of $534.36 billion and a stock price of $341,754 per share today [1].

Therefore, It is crucial to understand the full breakdown of the S&P 500 index and how does it relate to investment strategy, the overall economic performance of the country, and the global markets.

Disruption by technology innovation

The size of sectors and industries of the S&P 500 vary year-over-year due to macroeconomics and microeconomics factors, disruption, technology innovation, demography, consumer behavior, environment, and geopolitics.

The energy sector was the largest component of the S&P 500 index a decade ago when ExxonMobil was the world’s largest company by market capitalization. Today, energy becomes that smallest sector and ExxonMobil is no longer in the Dow Jones Industrial Average index due to climate change, disruption, as well as innovation in renewable energy and electric vehicle.

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On the other hand, information technology was a small sector in the S&P 500 index almost 10 years ago. Still, it becomes the largest sector today due to the explosion of technological innovation, semiconductors’ evolution, and the internet’s growth.

The disruptive innovation shifts the “brick-and-mortar” sectors such as industry, materials, real estate, and energy from the top to the bottom of the S&P 500 index. The technology revolution 4.0 brings sectors and industries that fuel the “digital economy,” like information technology and communication services, to the top of the list.

Deep dive: The S&P 500 sectors and industry by size

The performance of the S&P 500 index is measured by the performance of the sectors and the industries. The companies that make up the S&P 500 index is constantly reviewed, removed, and added based on their financial performance. Below is the complete breakdown of the S&P 500 by size as of July 31, 2020.

#1 Information technology

The information technology sector covers hardware, software, data processing, and, IT consulting, excluding internet services and home entertainment.

#2 Health care

The health care sector covers health care equipment, supplies, technology, and services, as well as pharmaceuticals and biotechnology companies excluding health care insurance.

#3 Consumer discretionary

The consumer discretionary sector covers businesses that are sensitive to economic cycles such as luxury goods, apparel, footwear, automobile, leisure equipment, restaurants, hotels, and vacations.

#4 Communication services

The communication services sector covers companies that provide news, advertising, social media delivered through the internet and broadband. The sector also includes providers of internet, wireless networks, cable, landlines, and broadband.

#5 Financials

The financial sector includes commercial banks, investment banks, asset management, hedge funds, financial exchanges, brokerage services, and an insurance brokerage and underwriter of property casualties, health, re-insurance, and others.

#6 Industrials

The industrials sector includes aerospace, defense, engineering, and electrical equipment manufacturers, building products, machinery, heavy equipment, construction equipment, and farm equipment.

#7 Consumer staples

The consumer staples cover businesses that meet basic needs and less sensitive to economic cycles. The sector includes food, beverages, tobacco, non-durable household goods, personal products.

#8 Utilities

The utility sector includes power, electricity, water, and gas producers, distributors, and retailers. The sector also includes independent power producers and renewables.

#9 Real estate

The real estate sector includes companies that manage and develop residential buildings, office space, shopping malls, hotels, resorts, retail stores. The sector excludes mortgage REITs.

#10 Materials

The materials sector includes manufacturing companies for chemicals, paper, glass, metals, steel, minerals, and forest products. The sector covers mining companies.

#11 Energy

The energy sector covers oil and gas companies that include exploration, production, refining, marketing, distribution, and storage of petroleum, coal, and consumable fuels.