The stock market is majorly divided into eleven sectors. These eleven sectors represent the key area of the economy of any country. In each sector, there are several companies which are publicly traded and share the same market. Investors should consider exchange-traded funds (ETFs) in the sector of their preference if they want to gain exposure to a specific sector of the economy or if they want to implement a sector-rotation strategy to establish their portfolio.
Here are the 11 sectors of stock market and the factors which affect the stock price of these sectors.
The financial sector is a vast sector consisting of banks, investment funds, real estate firms, insurance companies and many others. It’s one of the most important sectors of many developed economies of the world. In this sector, a large part of revenue is generated from loans and mortgages.
Factors Affecting the Financial Sector of the Stock Market
Following are the factors that are affecting the financial sector:
Rising financing costs on a moderate premise: As rates rise, it implies that financial firms can make more on the cash they have and using a loan they issue to their clients.
Decreasing regulation: Whenever the administration chooses to reduce the regulations, financial sector people will profit, since that implies it could diminish the burden while expanding benefits.
Assisting consumers with finance: As customers decline their obligation loads, they diminish the risk of defaults. This lighter load additionally implies that they may have a resistance for more obligation, further expanding gainfulness.
Popular Financial ETFs
• Financial Select Sector SPDR Fund
• SPDR S&P Bank ETF
• Vanguard Financials ETF
Technology sector is again a vast sector which covers a large part of stock market. In the era of 21st century, technology is playing a major role and almost everything is now linked with technology. This sector majorly consists of software developers, electronic manufacturers and IT firms.
Factors Affecting the Technology Sector of Stock Market
Factors that are affecting technology sector are:
Customer Profile: It includes the demographic, geographical and psychographic details of the customer. Consumers’ buying pattern, purchase history, time spent on software, etc. comes in customer profile. Customer profiling helps in evaluating the future revenues of a software firm.
Customer Engagement Lifecycle: Customer engagement is very important because it helps in the predictability of software business, how long the company will be able to make its client engaged with the firm.
A long commitment lifecycle with high expenses and difficulties in switchover is perfect and enables speculators to make precise forecasts about future programming incomes.
Scalability Potential: It depicts how scalable the company’s software product is. Market data sold by the financial company can multiply its revenue without any extra costs.
Adoption of New Technologies: Gone are the days, when software companies were selling their product on CDs leaving their consumers to learn self-installation and usage. Nowadays, cloud computing is the current trend. Companies are offering their products to their consumers where they are charging subscription fees instead of one-time payment.
While investing, it’s very important to observe closely on the openness of the firm towards the adaptation of emerging business trends.
Popular Technology ETFs
• Technology Selector Sector
• DJ Internet Index Fund
• Vanguard Information Tech ETF
3. Real Estate
Companies invested in industrial, residential and real estate come into the real estate sector. Rent income, real estate capital appreciation, etc. are some of the main source of revenue generated by companies in real estate sector.
Factors Affecting the Real Estate Sector of Stock Market
Here are the factors which affect real estate sector:
Demographics: Demographics are the information that portrays the framework of a population, for example, age, race, sex, salary, relocation pattern and growth of population. These insights are regularly disregarded however critical factor that influences how real estate is evaluated and what sorts of properties are in demand by the consumers. Major changes in the demographics of a country can largely affect real estate patterns for a very long period of time.
The Economy: Overall economic health of a country affects the value of real estate. Economy of a country is generally measured by the several economic indicators like GDP, manufacturing activity, goods’ prices, etc. Real estate sector gets slow automatically when the economy of a country slows down.
Interest Rates: Interest rates also impacts majorly on real estate sector. The ability of a person to purchase a real estate can get greatly influenced if any fluctuation or change arises in interest rate. When interest rates get increased, demand and prices of real estate gets lowered.
Government Policies: Government subsidies also impact the real estate sector of stock market. Government can increase the demand of real estate by tax credits, subsidies and deductions.
Popular Real Estate ETFs
• Schwab US REIT ETF
• Vanguard REIT ETF
• Vanguard Global ex-US Real Estate Index Fund ETF
In the utilities sector of stock market, utility service companies like water, electricity and gas comes. The utilities sector produces steady repeating income by charging customers and organizations that give higher-than-normal profit yields.
Factors Affecting Utilities Sector of Stock Market
Following are the factors which affect the utilities sector:
Debt Levels and Rising Rates: Utilities are capital intensive and in order to maintain organic growth, continuous inflow of funds are needed. A rise in interest rate will increase the cost of capital.
Weather: Weather plays a significant role in bringing demand for utilities. In a normal summer and winter season, the demand for utility services rises.
Popular Utilities ETFs
• iShares Global infrastructure ETF
• Utilities Select Sector SPDR
• Vanguard Utilities ETF
Mining, chemical, forestry, refining companies comes under materials sector of stock market. In supply chain industry, these companies comes at the beginning, so the chances of change is high in the business cycles.
Factors Affecting the Materials Sector of Stock Market
Following are the factors which affect the material sector:
Power: Conventional or non-conventional sources of power are the basic necessity for an industry to establish.
Transportation: Easy transportation access affects the location of any industry. The junction of the means of transportations become the humming centers of the several activities of the industry.
Popular Materials ETFs
• Materials Select Sector SPDR
• iShares US Home Constructions ETF
• Market Vectors TR Gold SPDR
The energy sector mainly consists of companies which are in production of oil and gas. Revenue is generated by the price of crude oil and natural gas.
Factors Affecting Energy Sector of Stock Market
Here are the factors which affect the energy sector:
Supply: Energy resources companies shows a quick response towards the demand of the products. As a result, a great fluctuation in the prices can be seen.
Weather Forecasts: It is a major factor which affects the prices of spot market and short-term futures contracts.
Government Policies: Supply and demand costs can be changed quickly by the Federal and State regulations.
Transport: There are several constraints in gas pipelines and electrical transportation capacity in US which take time and money to reverse.
Popular Energy ETFs
• Alerian MLP ETF
• Vanguard Energy ETF
• Energy Select Sector SPDR
Bio-tech companies, medical device manufacturers, hospital management agencies, etc. comes into healthcare sector. This sector is both a productive opportunity and defensive play because of the medical requirement of the people.
Factors Affecting the Healthcare Sector of Stock Market
Here are the factors which affect the healthcare sector:
Staff shortage: Shortage of staff happens because of the reduction in funding of hospital. This leads to the overworking shifts of doctors and nurses. This also leads to an increase in error and less quality time for patients’ care.
Uninsured families: In a country where unemployment rate is high, people do not get medical insurance funded by the company. As a result, many families do not afford to pay the fee of medical treatment. This leaves the families suffered from vulnerable diseases and sometimes death also.
Popular Healthcare ETFs
• Health Care Select Sector SPDR
• Vanguard Health Care ETF
• Nasdaq Biotechnology ETF
The industrial sector of stock market consists of machinery, fabrication, aerospace, and construction, manufacturing and defense firms. The growth of this sector depends on the current demand of construction and manufacturing of equipment.
Factors Affecting the Industrial Sector of the Stock Market
Following are the factors which affect the industrials sector:
Quality of Human Resources: There is a significant role of manpower in industrial sector. Skilled and motivated labors enhance the productivity of an industry.
Technological Development: Technology is the backbone of any industry. If the firm is not developed technically, it will not be able to stand in the market. Degree of mechanism, technical know-how, product design are the factors of technology which increases the productivity of an industry.
Popular Industrial ETFs
• iShares Transportation Average ETF
• Vanguard Industrials ETF
• Industrial Select Sector SPDR
Cable companies, Internet service providers, satellite companies, wireless providers, etc. consists the telecom sector of stock market. Recurring revenue from the customers is generated by these companies.
Factors Affecting the Telecom Industry of the Stock Market
Following are the factors:
Government Regulations: Government has set several rules and regulations on the usage of the internet. Net neutrality is a big issue in this sector.
Taxes and Expenses: Expenses affect the pricing of the plan which is offered to customers. Expenses in building towers and resources also affect the pricing of telecom sector.
Popular Telecom ETFs
• iShares US Telecommunications ETF
• Vanguard Telecom ETF
• iShares Global Telecom ETF
10. Consumer Discretionary
Retailers, consumer service providers, apparel firms, media companies, etc. are part of the consumer discretionary sector of stock market. Whenever consumer spending increases, economy improves and thus, this sector gets benefitted.
Factors Affecting the Consumer Discretionary Sector of the Stock Market
Here are the factors:
Prices and Interest Rates: Inflation affects the price which significantly affect the purchasing power of consumers. Level of spending on consumer goods is impacted by interest rate. High-end products like jewelry, automobiles are often purchased on credit. Higher interest rates can result the purchase of these products more expensive.
Consumer Confidence: When consumers are confident about the current economy and their future financial conditions, they make higher purchases. High level of confidence can affect the major purchases like purchase from the credit.
Popular Consumer Discretionary ETFs
• Consumer Discretionary AlphaDEX Fund
• Consumer Discretionary Select Sector SPDR
• Vanguard Consumer Discretion ETF
11. Consumer Staples
Food and beverage industry consists of consumer staples sector of stock market. Even in an economy fall, these companies will be defensive plays in the market as consumers will not cut their basic necessities.
Factors Affecting the Consumer Staples Sector of the Stock Market
Following are the factors that affect:
Input Cost Volatility: Input cost helps in determining the performance of a company. There is a direct effect of increased input cost on the company’s profits and margins.
Volatile Emerging Markets: The food and beverage companies are mainly investing in emerging economies like India, China and Brazil because of the significant growth potential due to less per-capita consumption in these countries.
Though, in these countries growth potential is strong but the market of these countries are volatile because of the fluctuation in the currencies. Political and structural issues also make these emerging markets volatile.
Popular Consumer Staples ETFs
• Vanguard Consumer Staples ETF
• Consumer Staples AlphaDEX Fund
• Consumer Staples Select Sector SPDR
The Bottom Line
The stock market is divided into eleven sectors and each sector possesses a unique and vibrant factor which affects its advisability. In order to achieve asset allocation goals, investors can use ‘n’ number of ETFs in a particular sector.
With the help of ETF tools, investors can screen, compare and analyze the huge space of ETFs.