DEFINITION of 'Sector Analysis'

Sector analysis is an assessment of the economic and financial condition and prospects of a given sector of the economy. Sector analysis serves to provide an investor with a judgment about how well companies in the sector are expected to perform.

Sector analysis is typically employed by investors who specialize in a particular sector, or who use a top-down or sector rotation approach to investing. In the top-down approach, the most promising sectors are identified first, and then the investor reviews stocks within that sector to determine which ones will ultimately be purchased. A sector rotation strategy may be employed by investing in particular stocks or by employing sector-based exchange-traded funds.

BREAKING DOWN 'Sector Analysis'

Sector analysis is based on the premise that certain sectors perform better during different stages of the business cycle. Early in the business cycle, for example, interest rates are low and growth is beginning to pick up. During this stage, companies that benefit from low interest rates and increased borrowing often do well. These include companies in the Financial and Consumer Discretionary sectors. Late in an economic cycle, when growth is slowing, defensive sectors such as Utilities and Telecommunication Services often outperform.

In sector rotation strategies, investors may define sectors in a variety of ways. But a commonly used taxonomy is the Global Industry Classification Standard (GICS) developed by MSCI and Standard & Poor's. GICS consists of 11 sectors, which are broken down into 24 industry groups, 68 industries and 157 sub-industries. The Consumer Staples sector, for example, consists of three industry groups: 1) Food & Staples Retailing, 2) Food, Beverage & Tobacco, and 3) Household & Personal Products.

These industry groups are broken down further into industries. Food, Beverage & Tobacco, for example, consists of those three, which are then broken into sub-industries. The Beverage industry, for example, is made up of three sub-industries: Brewers, Distillers & Vintners, and Soft Drinks.

Sector rotators and others who employ a top-down approach don't necessarily limit themselves to sectors. They may choose to emphasize industry groups, industries, or sub-industries.

RELATED TERMS
  1. Sector Rotation

    Sector rotation is the action of shifting investment assets from ...
  2. Service Sector

    The service sector is the portion of the economy that produces ...
  3. Industry Group

    An industry group is a classification method for companies, grouped ...
  4. Global Industry Classification ...

    The Global Industry Classification Standard - GICS is a standardized ...
  5. Open Rotation

    An order to buy or sell a security that is to remain active through ...
  6. Capital Goods Sector

    The capital goods sector refers to a grouping if publicly-traded ...
Related Articles
  1. Investing

    GICS Vs. ICB: Competing Systems For Classifying Stocks

    Global Industry Classification Standards and the Industrial Classification Benchmark separate stocks into sectors.
  2. Investing

    Analyzing Mutual Fund Risk

    Find out whether a fund's performance is a result of the manager's abilities, or just a fluke.
  3. Investing

    Shifting Focus To Sector Allocation

    Investing in sectors may trump international investments for providing diversification.
  4. Investing

    Are You a Bottom-Up or Top-Down Investor?

    Both bottom-up and top-down approaches are used to pick stocks. Here's a look at how they work.
  5. Investing

    Big Changes Are Lurking for Popular Sector ETFs

    Big changes could be coming for some well-known sector ETFs.
  6. Investing

    The 10 Worst Sectors of 2016 (XLF, XLY)

    Some of the best performing sectors of 2015 have become the worst performers in 2016. Find out about the 10 worst performing sectors so far in 2016.
  7. Investing

    Richly Valued Defensive Sectors May Be Offering Discounts

    The once expensive consumer staples and utilities sectors may finally be inexpensive.
  8. Investing

    How to Day Trade Sector ETFs Every Day

    Sector ETFs provide a liquid asset that day traders can trade each and every day. Here's how to find which sector ETFs to day trade and what to watch for.
  9. Trading

    Historical Sector ETF Performance for January (XLV, XLK)

    Most sector ETFs have historically performed poorly in January, with the exception of one.
  10. Investing

    ETF Investing: Is XLP Consumer Staples Still a Buy?

    Get a review of State Street's Consumer Staples Select Sector SPDR ETF, and find out why this ETF may be a wise buy for investors in 2016.
RELATED FAQS
  1. What is the Difference Between an Industry and a Sector?

    The terms industry and sector are often used interchangeably, but they have slightly different meanings, with a sector being ... Read Answer >>
  2. When during the economic cycle should I invest in the banking sector?

    Learn how your individual investing style determines what phase of the economic cycle is the best time to invest in the banking ... Read Answer >>
  3. How attractive is the retail sector for a growth investor?

    Learn how retail's volatile nature makes it attractive to growth investors, and discover the strategies these investors employ ... Read Answer >>
  4. What is the historic average annual return of the food and beverage sector?

    Examine the current state of the food and beverage sector, along with learning the historical average annual returns for ... Read Answer >>
  5. What is the internet sector?

    Learn what products and services comprise the Internet sector and some of the key companies that shape it. Also what part ... Read Answer >>
Hot Definitions
  1. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  2. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  5. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  6. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
Trading Center