This paper examines the applications of U.S. sector indices in a portfolio context, from the perspective of both international and domestic investors. We shall:
• Outline the Global Industry Classification Standard (GICS®) classifications of sector and industry groups;
• Illustrate the importance of sectors in determining portfolio returns, in relative and absolute terms;
• Demonstrate the importance of the U.S. market in accessing global industries and sectors, and illustrate the growth in related products;
• Illustrate the potential applications of sectors in achieving diversification goals;
• Indicate how sectoral groupings help connect broader trends to their market effects;
• Compare the effectiveness of sector-selection and stock-selection strategies;
• Show that—in a multi-asset context—the impact of changing the mix of equity sectors can be comparable to the impact of adjusting stock and bond allocations; and
• Provide a long-term perspective on the sectoral composition of the U.S. market.
The first few sections summarize the importance and classification of sectors, offer basic examples of international applications, and highlight the growth of related products. Readers interested in more advanced topics related to tactical sector rotation strategies will find them addressed in the later sections.