September 2022 - Navexa Blog

Different market sectors offer unique opportunities and risk for investors, as well as ways to diversify a portfolio. These are the 11 key market sectors, and the pros and cons of each.

The US stock market is packed with different types of companies, focused on a massive range of products and services. This market is broken down into 11 sectors. This creates a lot of different options for investors in terms of which sectors and industries they want to get exposure to by buying shares.

Each sector has its own advantages and disadvantages. We’ll introduce each and then examine the pros and cons.

Why Invest in Different Sectors?

Investing in different sectors allows for portfolio diversification and can be a key element of wealth management. A diversified portfolio, with a variety of stocks, dividends, and ETFs, offers exposure to different parts of the market. This, in turn, exposes the portfolio to both the potential risks and returns of each sector. The key idea of diversification is that the risks associated with one sector are balanced by the returns of the other.

If you own or plan to own a diversified portfolio, Navexa can help you track it. Our platform helps you map your financial goals and automates tax reporting. You can start using it today for free, and upload your holdings in minutes.

The US stock market is broken into 11 key sectors.

What Is the GICS System and Why Is It Important?

The Global Industry Classification Standard (GICS) divides the investment market into 11 sectors further comprising24 industry groups, 69 industries, and 158 sub-industries. This is a common system that investors use to learn how companies are classified, and what ETFs and mutual funds consist of.

The GICS was created in 1999 by MSCI and Standard & Poor’s. This classification system includes the following groups:

Sectors
Industry groups
Industries
Sub-industries

It’s occasionally revised, following the growth and developments of certain industries. For example, the latest addition was the real estate sector. This sector was included in 2016, due to the increasing growth and importance of real estate and equity REITs.

This change had a powerful effect on the real estate sector. For example, it drove more money to real estate companies. Additionally, large fund companies had to purchase more real estate stocks to offer them in index funds. Adding the real estate sector to the GICS opened doors for other changes and introduced investors to new options.

However, the GICS is not the only method of classifying industries and sectors. The Industry Classification Benchmark (ICB) is one alternative. The ICB schema was developed in 2005 by Dow Jones and FTSE. It divides the market into 11 industries and 20 supersectors, which are further divided into sectors/sub-sectors. The ICB standard is used in many international markets, including NASDAQ and NYSE.

Today, we’ll focus on the Global Industry Classification Standard and its 11 stock market sectors.

The GICS was created by Standard & Poor’s in 1999.

Key Information on the 11 Sectors Plus Pros and Cons

These 11 stock market sectors represent 11 groups of public companies that share similar business activities, products, services, or features.

1. Energy: Exposure to Different Stocks

The energy sector includes companies that focus on the exploration and production of energy products. However, with COVID-19, there has been a change in how energy resources are seen and utilized. The pandemic increased interest in renewable energy sources due to the energy pressures it exacerbated. Renewable energy infrastructure has shown potential to address some of those pressures. Still, investments in the clean energy sector are generally not as stable as investments in oil and gas.

Some of the top categories in this sector are:

Oil and natural gas stocks
Pipeline and refining stocks
Mining stocks
Renewable energy stocks

Companies in the energy sector aren’t limited to just one category. Instead, they’re often focused on several operations around one energy product.

Additionally, the energy sector is vast. It accounts for trillions of dollars annually, and will always be in demand. Companies that increase the prices of their services tend to have more money to set aside for dividend payments. This sector also offers a variety of investment opportunities, from ‘traditional’ like oil and gas, to solar and wind energy stocks.

However, there are certain risks involved in investing in this sector:

Can be a highly volatile market
Companies involved in this sector often need to make huge investments into research and development and might lose money
There’s a chance of regulatory risk regarding limitations on the production of some energy sources
New technology may reduce long-term demand

2. Materials: Performs Well When the Economy Grows

The materials sector refers to companies that take raw materials or natural resources and turn those into useful products. Companies that produce chemicals, paper, glass, metals, packaging, construction materials, and so on.

This sector usually does well when the economy is growing and there’s a high demand for certain products. However, many things affect this sector, such as:

Changes in the supply chain
Cyclical demand for materials
Changes in the economy that affect companies
Legislation
Inflation

3. Industrials: Essential for the US Economy

The industrial sector is one of the essential sectors of the US economy. It performs three functions:

Producing and distributing capital goods
Offering commercial services
Providing transportation services

The companies operating in these sectors are often related to aerospace, construction, transportation, waste management, and similar.

As with any other investment, recognizing the best company in the market is challenging. Investors often check whether the company has diversified operations, low operating costs, and solid credit ratings.

The industrial sector has a cyclical nature. Thus, it’s more suited for risk-tolerant investors. The sector is strong during economic growth. However, economic downturns directly reduce the demand for industrial goods and services, which may cause stock prices to drop.

The industrial sector includes construction, transportation and waste management.

4. Consumer Discretionary: Another Cyclical Sector

This sector deals with goods and services that aren’t considered essential for people. Usually, these include items and offers people can purchase if they have enough income. For example:

Cars
Durable goods
Leisure equipment
Household items
Media production
Apparel
Services like hotels and restaurants

This sector is the most sensitive to economic cycles. The companies that offer consumer discretionary products will grow quickly in a good economy, but slow down when the economy contracts.

Gross domestic product (GDP) is one metric to consider when investing in this sector. If GDP is on the rise, people are more likely to afford these items and services and the demand will increase.

5. Consumer Staples: Low Stock Decline During Bear Markets

In contrast to the consumer discretionary sector, the consumer staples sector includes companies involved in the production of foods, drinks, tobacco, and non-durable household items. The consumer staples sector tends to generate consistent revenue even during recession periods. Companies involved in the consumer staples sector may face lower stock declines during bear markets.

What’s more, it might happen that the demand for consumer staples increases during economic downturns. Those who invest in this sector usually benefit from dividend income, depending on their investment decisions.

The volatility in consumer staples is generally lower. This industry matures with modest growth.

The healthcare sector is one to watch right now, with record numbers of people reaching old age.

6. Healthcare: Essential for Aging Demographics

This sector includes companies that provide healthcare services and manufacture healthcare equipment and technology. These companies are present at all stages of pharmaceutical and biotech research, including development and production.

This is a highly interesting sector, with quickly growing companies and overall above-trend growth. Companies in the healthcare sector are often considered a hedge against market downturn.

These are the common healthcare stocks:

Drug stocks
Medical device stocks
Payer stocks (like insurers)
Healthcare provider stocks

There are several things to consider when looking into healthcare sector companies:

The company’s growth data
Growth strategies
Potential mergers and acquisitions
Financial statements
Valuation
Dividends

When it comes to risks, the primary issue is competition. A competitor discovering better products and services may drive another company down. The healthcare sector is also highly regulated, but any new regulation and/or FDA decision can drastically affect the company and its stock.

Additionally, drug companies are exposed to litigation risks.

Still, aging demographics and technological advancements should, generally speaking, positively affect the healthcare sector long-term.

7. Financials: Banking, Insurance, Finance

The financial sector includes companies involved in providing products and services around mortgages, banking, consumer finance, insurance and similar. This is one of the most important market sectors for the economy.

Types of financial sector stocks include:

Bank stocks
Insurance
Stocks from companies involved in other financial services
Mortgage REITs
Blockchain and cryptocurrencies
SPACs

The financial sector dictates how the economy functions, since it ensures the free flow of capital and liquidity in the marketplace. When the financial sector is strong, many other market sectors follow suit. Generally, this sector has shown robust growth and profitability. Still, it can be affected by changes in interest rates and other economic factors.

The financials sector includes banks, brokers and blockchain companies.

8. Information Technology: Offers Four Mega Sectors

The information technology sector involves companies that produce software and IT products and services. This includes the manufacturing of hardware, mobile phones, computers, and similar. Therefore, some experts divide this sector further, into four ‘mega sectors’:

Semiconductors
Software
Networking and internet
Hardware

The information technology sector is also widely used by many other industries. It’s one of the fastest growing stock market sectors in the last decade and contains some of the largest companies in the market (think Microsoft, Adobe, Oracle Corp, and so on).

Still, many new companies in this sector don’t produce cash flow right away. Competition is fierce in the space, and investors often use guesswork instead of calculated valuation to invest in a company.

9. Communication Services: New vs. Old

The communication services sector includes companies involved in everything from traditional media to the internet. This also includes entertainment-oriented companies, products like interactive games, communications services and so on.

The usual methods of analyzing communications stocks are:

Comparing companies that operate in the same industries
Comparing companies that are at similar stages of growth
Analyzing user base size and engagement trends
Paying attention to the company’s expenses

The communications sector offers growth opportunities for companies that focus on online services. On the other hand, companies that work with traditional communication services and products may face challenges as the industry evolves rapidly.

10. Utilities: Attractive Even in a Bad Economy

This is one of the stock market sectors that’s also essential for the economy. Companies in this sector provide electricity, gas, and water to commercial and retail users. Generally, this sector offers steady performance.

The utilities sector usually offers dividends to the company’s shareholders. Additionally, economic downturns can make utilities attractive for long-term investing. This sector generally has lower volatility.

On the other hand, the utilities sector is intensely regulated. Regulatory change can negatively impact these businesses. Organizations in this sector may also have to invest in expensive infrastructure to provide their services. This can place them in debt, which in turn can be sensitive to interest rate changes.

Real estate goes far beyond physical property, with REITs, development companies and other property-adjacent market opportunities.

11. Real Estate: Great for Portfolio Diversification

The real estate sector includes several indirect investment opportunities:

Companies that work in real estate services
Real estate developers
Equity REITs

Besides purchasing stocks from companies involved in this sector, investors also make money by renting and flipping properties (direct investing). This sector generally has steady growth. Depending on the type of investment, it can offer quick returns (flipping) or steady income (renting).

Investing in the real estate sector is a popular way to diversify one’s portfolio. This sector is not closely correlated to stocks, bonds, or commodities. Still, there are some limitations of directly investing in this sector:

Managing tenants
Potential property damage
Reduced income from vacancies
Requires deep market knowledge

When purchasing real estate stocks, investors should be careful about:

Management costs
REIT’s low growth
Interest rate changes
Possible market downturns

The 11 Stock Market Sectors and Ways to Invest

There are many different ways to invest in each of these market sectors. Some of the most common ones include ETFs, investment trusts, and index funds. Here’s how investors usually get in:

Energy sector: The easiest way to get into the energy sector is via mutual or index funds. There are many funds to choose from, and each is managed according to a strategy or energy index.
Materials, industrials, consumer discretionary, and consumer staples sectors: These sectors usually offers dividends, so buying individual stocks is one way to go. Some ETFs invest in companies in this sector as well.
Healthcare sector: Utilizing ETFs and healthcare mutual funds is the popular way to enter this market.
Financials, communication services sector and information technology and utilities: The most common way to get involved with these is through individual stocks.
The real estate sector: This market comes with several investment opportunities beyond property itself, such as REITs, real estate stocks (via a brokerage account or a tax-qualified retirement account), ETFs, index funds, and Real Estate Investment Groups (REIGs).

The Navexa portfolio tracker helps you track & analyze investments across every sector, asset class and multiple trading accounts.

These 11 Sectors Offer Unique Market Exposure And Diversification Opportunities

These market sectors are key to portfolio diversification. From products and services essential to everyday life, through to more speculative technology projects, diversifying across these sectors can expose a portfolio to a variety of potential risks and rewards..

For example, the materials sector, utilities sector, and services sector are key components of the economy, regardless of whether it’s growing fast or slow. Still, companies in these stock market sectors are often affected by market downturns, interest rates, and economic changes — some more than others.

However you invest or diversify, whether you’re into high-growth tech stocks, or slower, steadier opportunities like consumer staples and real estate, you must always track your trades, transactions and investment performance.

Why? Because it’s essential to both optimizing your investment journey through data-driven decision making, and meeting reporting requirements at tax time.

Navexa helps you do all of this in an easy-to-use, accurate portfolio tracker currently being used by thousands of investors around the world. With detailed performance analytics and reporting on diversification, portfolio contributions, income and more, Navexa gives investors actionable insights on their portfolio.

Create an account free today and see your portfolio like you’ve never seen it before.

Foreign investment taxes can be complex. Generally, investors will pay capital gains tax or income tax, depending on the conditions. Here’s how to deal with Australian taxation on foreign investments.

Many Australians want to know how and where to invest in foreign stocks, property, bonds and other investments. This means they need to understand the tax implications of doing so. Australian taxation rules might seem complex when it comes to investing in foreign stocks.

The Australian government has signed many tax treaties. These provide benefits to Australian residents who invest in foreign stocks in countries that have tax treaties with Australia. Such treaties sometimes mean Australian residents may be exempt from paying tax. However, they may have to pay it in the foreign country.

If there’s no tax treaty, Australian residents may have to pay tax on every type of investment gain. Some might be eligible for a discount, depending on how long they have held the investment.

Generally speaking, foreign investments are taxable, be it in the source country or Australia. If you’re an investor, you’ll most likely pay capital gains tax or income tax. Keep reading to learn about Australian tax on foreign investments and how easy it is to track them using the Navexa portfolio tracker.

Overseas Investing From Australia

Australian residents are free to invest in foreign assets. They can own overseas property, offshore bank accounts, businesses, and stocks. Owning foreign investments requires that Australians comply with the latest rules and regulations regarding tax.

foreign investment tax — Australians can invest overseas, but need to understand their domestic and foreign tax obligations.

Interacting with the Australian Tax System

Every Australian resident is subject to tax on their income. This includes investment income such as dividends as well as capital gains from foreign investments. However, the Australian government has signed more than 40 tax treaties with other countries, including the US.

The US-Australia tax treaty gives Australian investors certain benefits. For example, there’s a reduced tax rate for US-sourced income (dividend payments) if certain conditions occur. Investors can also fill out specific forms that drop the rate of withheld tax from 30% to 15%. But, they may have to pay taxes in the US.

Australian investors might be able to claim US withholding tax from their dividends as a Foreign Income Tax Offset (FITO). FITO helps reduce taxes on foreign earnings.

But FITO rules are complex. It may be useful to seek professional guidance around this. Both the Inland Revenue Service (IRS) and US tax advisors can provide in-depth information for individual situations.

W-8BEN-E: A Key Form For Foreign Investors

The US government requires Australian investors fill out certain forms when investing in the country. A W-8BEN-E is a common form. It determines which investors are subject to paying 30% of their gross income earned in the US to the IRS. This form defines:

Interest
Royalties
Annuities
Rent
Premiums
Compensation for services
Substitute payments, if applicable

It’s required for all US holdings and remains valid for three years. If your information changes, you’ll be required to submit an update.

Do Australian Residents Pay Tax on Gains and Income from Foreign Investments?

Australian residents for tax purposes have to declare the income they earn regardless of where that income came from. This is called the ‘worldwide income’ and it includes:

Pensions
Annuities
Business activities
Employment
Assets
Investments
Dividends from shares
Capital gains on overseas assets
Interest from bank deposits or bonds
Rental income from real estates
Royalties from intellectual property

If you have a temporary resident visa, you won’t pay tax on income. In case you receive income from a country that hasn’t signed a tax treaty with Australia, you’ll likely pay taxes in both countries. However, the tax you pay in a foreign country may make you eligible for FITO.

Australia also receives and exchanges information on all financial accounts with many foreign tax authorities.

How Is Foreign Investment Taxed?

Australian investors who have foreign assets and receive income from overseas will usually have to pay capital gains tax once they sell that asset. However, there could be other forms of taxes they are required to file (such as income from dividends). This is why it’s important to keep all the records on transactions, regardless of the country in which you invest.

Here’s where Navexa makes life easier. Our smart portfolio tracker lets you track foreign investments in both their local currency, and your tax residency’s currency, too.

This makes it super simple to monitor the performance of your foreign shares and keep records of all transactions for tax and compliance purposes.

Types of Investments and Their Taxation

Australian investors have access to several investment opportunities abroad. These are the most common ones.

Buying & Selling Stocks

Australians can own foreign stocks. Any individual who holds shares for more than 12 months may be eligible for the CGT discount. If they make a gain when they sell, Australian investors are required to notify the Australian Taxation Office. Investors are also advised to consult with the foreign tax authority to check the taxation process on capital gains.

Receiving Dividends From Foreign Investments

The way dividends are taxed depends on the tax treaty between Australia and the source country. In many cases, the source-country dividend tax is limited to 15%. Receiving dividends from companies that satisfy certain public listing requirements may result in tax exemption.

Depending on the conditions, some investors may be eligible for ‘franking credits’. That’s a form of tax credit that can offset against tax on dividends. Generally speaking, those who hold shares for a certain holding period (45 or 90 days) may be eligible.

Cryptocurrencies

In recent years, cryptocurrencies have become a major investment theme for Australian residents. When it comes to paying tax, Australian investors have to pay capital gains tax on crypto. On the other hand, professional traders pay income tax.

P2P Lending

Peer-to-peer (P2P) lending is a form of investment that’s accessible globally. Australians can access P2P lending platforms and lend money to borrowers without an intermediary. Peer-to-peer lending income listed in an investor’s loan portfolio will be included in the tax return form. For most people, this income is taxed like income from other investments. Australians who earn via P2P lending in foreign countries should consult their accountant.

Property Income

Australians who realize a gain when they sell foreign property are required to pay capital gains tax. However, if they held the property for 12 months or longer, they might be eligible for a 50% capital gains tax discount.

Additionally, investors who are subject to an overseas tax after selling their property will receive tax credits in the form of a foreign tax offset. Rental income may also be taxable in Australia or a foreign country, depending on the location of the property and current tax treaties.

Purchasing Bonds

Bonds can be highly tax efficient, since there are some benefits for those who hold them for 10 years. Otherwise, bonds are subject to the corporate tax rate of 30%. Investing in bonds means investors might not be eligible for tax credits and some other benefits.

Foreign Investment Capital Losses

Investors may sell a foreign investment for a lower price, and end up with a capital loss. In some cases, investors can use capital losses to reduce capital gains tax. Capital losses must be used at the first opportunity, unless there are restrictions. Capital losses can’t be used to reduce income, and should be reported to ATO just like capital gains.

Foreign Investments: Track Everything Correctly

If you’re an Australian resident for tax purposes, you’ll be required to pay some form of Australian tax on foreign investments.

In general, all your worldwide income will be subject to tax, it’s just a matter of where you pay that tax. It’s always a smart idea to get familiar with the laws around this, and to consult professionals regarding your personal financial situation.

Further to this, serious investors should always track their transactions and portfolio performance for the purposes of both compliance and optimizing their investment strategy.

The Navexa portfolio tracker does exactly this. Track Australian and overseas investments, access detailed performance analytics on income, currency, trading fees and more.

And, most importantly, ensure your foreign investment gains and income are reported accurately at tax time.