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What are sector indices?

Sector indices

These indices give summaries and benchmarking data certain sectors or industries. It allows investors to track a stock against specific sectors.

Where have you heard about sector indices?

You may have heard in the news about certain companies or sectors lagging behind other peers. Your financial adviser may have made recommendations of shares based on how they outperform rivals within the same sectors. They would have used sector indices to track this information.

What you need to know about sector indices.

Every trading company sits within an area of the economy, or sector. Grouped wth it will be businesses which share a related product or service. By dividing businesses and the economy into groups it allows investors to be able to conduct a great analysis of how the economy, as a whole, is performing. Examples of sector indices are: energy, services, healthcare, consumer products, industrial, materials, utilities, technology & communications and financial.

There are two classification systems for sector indices:

  • Global Industry Classification Standard(GICS): this was created by Morgan Stanley Capital International (MSCI) and Standard & Poor's in 1999. It has 11 sectors, 24 industry groups, 68 industries and 157 sub-industries. It has sorted more the 95% of the world's market capitialization
  • Industry Classification Benchmark(ICB): Created by Dow Jones and FTSE, it classifies both domestic and international stocks. Based on a four-tier, hierarchical industry-classification structure, it uses a system of 10 industries, divided into 18 supersectors, which are further broken into 39 sectors (containin 104 subsectors). It represents about 65% of the world's market capitalization.

By tracking the companies you have invested in against others in the same sector, you can discover whether good performance is the result of the individual company's efforts or the result of general sector growth.

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