‘Sector’ is a broad term that is often used to describe companies involved in similar or related areas of business, and it is something that investors tend to look at when constructing their portfolios. While investors often tend to sectors that they personally favour, a wise investor would tend to diversify their portfolio so that sector-specific risks only impacts a portion of the portfolio, rather than the whole portfolio.
Sectors can be further broken down into industry groups, industries and sub-industries, and this comprehensive guide will give readers an insight into what the largest sectors are, what the main industries in each sector are, what the largest ASX-listed companies in each sector are, and when each sector tends to perform the best during the stock market cycle.
The ASX Materials sector includes 745 companies, of which 39 are included in the S&P/ASX 200 Materials (XMJ) index. The Materials sector encompasses 17.3% of the ASX 200 and can broadly be segregated into Metals & Mining, Chemicals, Construction Materials, Container & Packaging, and Paper & Forest Products. The Materials sector is the largest sector by the number of companies and the second-largest sector by market share on the ASX. The major companies on the ASX include BHP (Metals & Mining), Fortescue Metals Group (Metals & Mining), Rio Tinto (Metals & Mining), South32 (Metals & Mining), Mineral Resources (Metals & Mining), and BlueScope Steel (Metals & Mining). The Materials sector often performs best in late bull markets.
The ASX Financials sector includes 289 companies, of which 28 are included in the S&P/ASX 200 Financials (XFJ) Index. The Financials sector comprises 28.5% of the ASX 200 and can broadly be segregated into Diversified Financials, Insurance, and Banks. The Financials sector is the largest sector on the ASX by market share and the largest contributor to Australia’s national economy, boosted by over $3.1tn of Australian superannuation assets and Australia’s big banks. The major companies on the ASX include the big banks of Commonwealth Bank (Banks), Westpac (Banks), National Australia Bank (Banks), ANZ (Banks), Macquarie Group (Banks), and QBE Insurance (Insurance). The Financial sector tends to perform best in early bull or late bear markets.
The ASX Real Estate sector includes 79 companies, of which 18 are included in the S&P/ASX 200 A-REIT (XPJ) Index, which is a benchmark for the Australian real estate investment trusts (A-REIT) and mortgage REITs. The Real Estate sector covers 7.0% of the ASX 200 and can broadly be segregated into Equity Real Estate Investment Trusts (REITs) and Real Estate Management & Development. As property is loved by investors in Australia and real estate is an expensive and relatively illiquid asset, REITs provide diversified exposure to this asset class. The major companies on the ASX include Goodman Group (REIT), Scentre Group (REIT), Mirvac Group (REIT), Dexus (REIT), Stockland (REIT), and Lendlease Group (Real Estate Management & Development). The Real Estate sector often performs best in late bull markets.
The ASX Energy sector includes 144 companies, of which 11 are included in the S&P/ASX 200 Energy (XEJ) index. The Energy sector comprises 3.3% of the ASX 200 and can be broken down into two subsectors: Energy Equipment & Services as well as Oil, Gas & Consumable Fuels. Oil, Gas & Consumable Fuels encompasses companies throughout the entire supply chain including energy resource exploration, production, logistics and refinement. As the world’s largest coal exporter and a key player in uranium and liquid natural gas, Australia has had a large stake in this space. Going into the future, non-traditional renewable energy companies are expected to bring increased competition to the Energy sector. Since Energy demand tends to move in tandem with the market, the sector performs best during market peaks. The major companies on the ASX include Woodside Petroleum (Oil, Gas & Consumable Fuels), Santos (Oil, Gas & Consumable Fuels), Oil Search Limited (Oil, Gas & Consumable Fuels), Ampol (Oil, Gas & Consumable Fuels) and Worley (Energy Equipment & Services).
The ASX Consumer Discretionary sector includes 142 companies, of which 23 are included in the S&P/ASX 200 Consumer Discretionary (XDJ) index. The Consumer Discretionary sector comprises 8.6% of the ASX 200 and can be broken down into Retailing, Consumer Services (including hotels, restaurants, and gaming), Consumer Durables & Apparel and Automobiles & Components. The Consumer Discretionary sector provides non-essential goods and services, consequently, this sector performs best during times of economic growth during which consumers have higher levels of disposable income. The major companies on the ASX include Wesfarmers Limited (Retailing), Aristocrat Leisure (Consumer Services), Domino’s Pizza (Consumer Services), Tabcorp Holdings (Consumer Services) and IDP Education Limited (Consumer Services).
The ASX Consumer Staples sector includes 76 companies, of which 14 are included in the S&P/ASX 200 Consumer Staples (XSJ) index. The Consumer Staples sector comprises 4.9% of the ASX 200 and can be broken down into Food, Beverage & Tobacco, Household & Personal Products and Food & Staples Retailing. This sector is non-cyclical since essential products will always be in demand, therefore it is relatively unaffected by neither economic nor market cycles, thereby leading to reduced volatility. Consequently, the Consumer Staples sector is viewed particularly favourably when early signs of a bear market arise. The major companies on the ASX include Woolworths Group Limited (Food & Staples Retailing), Coles Group Limited (Food & Staples Retailing), Endeavour Group Limited (Food & Staples Retailing), Treasury Wine Estates (Food, Beverage & Tobacco) and The A2 Milk Company (Food, Beverage & Tobacco).
The ASX Health Care sector includes 183 companies, of which 14 are included in the S&P/ASX 200 Health Care (XHJ) index. The Health Care sector comprises 10.6% of the ASX 200 and can broadly be segregated into Health Care Services, Medical Devices and Equipment, Medical Insurance, Biotechnology, and Pharmaceuticals. The Health Care sector, specifically the Health Care Services sub-industry is unique as many of the services are provided by the government. The major companies on the ASX include CSL Limited (Biotechnology), Sonic Healthcare (Medical Devices), ResMed (Medical Devices), Cochlear (Medical Devices), and Ansell (Medical Equipment). The Health Care sector tends to perform best in early bear markets.
The ASX Communication Services sector includes 76 companies, of which 11 are included in the S&P/ASX 200 Communication Services (XTJ) index. The Communications Services sector comprises 5.4% of the ASX 200 and can be broken down into Media & Entertainment and Telecommunications Services. This sector performs best during the early stages of bull runs in the market. Whilst the individual companies in this sector tend to be volatile, there is consistent demand for this sector’s services. The major companies on the ASX include Telstra Corporation Limited (Telecommunications Services), REA Group Ltd (Media & Entertainment), TPG Telecom Limited (Telecommunications Services), SEEK Limited (Media & Entertainment) and Spark New Zealand Limited (Telecommunication Services).
The ASX Industrials sector includes 157 companies, of which 22 are included in the S&P/ASX 200 Industrials (XNJ) index. The Industrials sector makes up 7.6% of the ASX 200 and can largely be split in three main industry groups – the Transportation industry, the Commercial & Professional Services industry, and the Capital Goods industry. The transportation industry tends to perform the best during the early bull run in the market, while the other two industries tend to perform most strongly during the late bull stage of the market. The demand for the goods and services provided by the companies in this sector tends to be stable, which means that the returns tend to be steady, if unspectacular. The major components of the XNJ include Transurban Group (Transportation), Sydney Airport (Transportation), Brambles Limited (Commercial & Professional Services), Reece Limited (Capital Goods) and Qantas Airways (Transportation).
The ASX Information Technology sector includes 188 companies, of which 14 are included in the S&P/ASX 200 Information Technology (XIJ) index. The Information Technology sector makes up 5.2% of the ASX 200 and can be split into three main industry groups – Software & Services, Technology Hardware & Equipment, and the Semiconductors & Semiconductor Hardware industry group. The tech industry, as it is commonly known, tends to perform the best during the early-mid bull run stage in the market, and is known as a growth sector. The largest companies in the information technology space in Australia include Afterpay Limited, Xero Limited, WiseTech Global Limited, Computershare Limited, and NEXTDC Limited. All of these companies are in the Software and Services industry and are more than twice as large as the largest company in the Technology Hardware & Equipment industry – while the third industry group doesn’t consist of a single large-cap name.
The ASX Utilities sector includes 24 companies, of which 4 are included in the S&P/ASX 200 Utilities (XUJ) index. The Utilities sector makes up 1.6% of the ASX 200 (making it the least represented sector) and consists of five main industry groups – Electric Utilities, Gas Utilities, Water Utilities, Multi-Utilities and Independent Power and Renewable Energy Producers. The Utilities sector tends to perform the best during the early-mid bear phase of the stock market cycle, seeing as this tends to match up with the peak of the economic cycle – which benefits companies with revenue partially tied to inflation the most. The largest companies in the sector include APA Group (Gas Utilities), AusNet Services (Electric Utilities), Mercury NZ Limited (Electric Utilities), and Origin Energy (Electric Utilities).
It should be noted that a well-diversified portfolio doesn’t necessarily need to match the sector allocations that the ASX 200 or broader All Ords have; through your research, you might discover tail-headwinds for a particular sector or industry which might make you go over-underweight in these sectors, while the phase of the stock market cycle might also cause you to change the sector composition of your portfolio. What the sector allocation of the market however does do, is provide investors with an idea of how the broader index is constructed, which serves as a good basis point for attempting to beat the market.