When having a casual conversation with a friend, you may use the words “sector” and “industry” interchangeably. In our laid back vernacular, we generally use those words to loosely describe areas or categories of businesses that are different from one another. However, when it comes to investing, sectors and industries hold distinct meaning and they pair with each other in a hierarchical relationship.

In investing, Sectors are the godfathers of the classification system of business operations and companies. Beneath each sector, there are industry groups, industries, and sub-industries that further delineate each category into smaller and more detailed segments. In this article, we will examine the 11 different sectors as defined by the Global Industry Classification Standard (GICS), a massive database maintained by MSCI, one of the largest index providers in the world. GICS (and other competitors) seeks to standardize how we define companies, mapping them in a web of groupings to help interested parties compare and assess various businesses. Rather than fall asleep trying to understand the methodology to the madness, we’ll just touch on the main points of each sector and their relevant investment traits.

Energy: this sector completely revolves around oil & gas and its related activities. From companies that “drill baby, drill”, to pipelines, equipment, and gas stations, anything and everything that touches the black stuff lives in this sector. For obvious reasons, the fortunes of energy companies (and stocks) depend heavily on the global price of oil, which is a barometer for economic and geopolitical factors such as supply and demand.

Materials: the Materials sector spans the gamut of all the “stuff” we extract from the natural world to refine into goods we use and sell in real life. This includes companies that turn trees into paper goods, building suppliers that turn wood into construction products, and companies that pull metal out of rocks (e.g., gold, iron ore, copper) and turn it into commercial products like steel. Like the Energy sector, businesses in these industries are sensitive to external forces, such as the price of commodities (for mining companies) or the health of the economy (for construction companies). Unlike Energy, Materials are not dependent on one single commodity (oil), so the behavior of these sub-industries may act very differently from one another.

Industrials: this is the catch-all sector of businesses that don’t quite fit into other GICS sectors. Industries within Industrials include manufacturers of equipment such as airplanes, factory machinery, and electrical equipment. It also includes service companies like environmental and sanitation firms, employment and human resources, and consulting. As a diverse sector, companies within Industrials may be sensitive to the economy (think railroad operators or farm equipment makers), but others could have “secular drivers” for their business that are much more dependent on the execution of their company strategy.

Consumer Discretionary: finally, a sector we all understand. These are companies that sell goods to people that they may want but don’t necessarily need. For different reasons, such as cost per unit or the ability to “wait it out”, customers tend to use discretion when purchasing these products, hence the name. Examples include goods like cars, washing machines, and apparel; and services such as restaurants and hotels. Since many of these items are not “must-haves”, Discretionary stocks are tied to consumers’ appetite to spend. To grab the eye of buyers, many of these businesses spend years and decades investing in their brand and product niche in order to build a competitive advantage against rivals.

Consumer Staples: another consumer sector, but Staples are things we need on a daily basis. Toilet paper, food, drinks, and grocery stores are things we consume regardless if we’re billionaires or live paycheck-to-paycheck. As a result, Staples companies have less to worry about when the economy is in the dumps, so it is considered a “defensive” sector. Many of these companies spend copious amounts of money to convince you that their deodorant, soda, or potato chip is better than the one next to it on the shelf. If they succeed, they may earn your business for a very long time.

Health Care: anything related to the well-being of living things belongs in this sector. Drug companies, hospitals, medical equipment, and medical research firms are some categories that come to mind. Parts of the Health Care sector can be considered defensive (like Big Pharma), but others can be exceptionally risky, such as biotechnology stocks that have all their eggs on one potential blockbuster drug. Less sensitive to the economy, Health Care is another “defensive” sector whose companies are more dependent on execution of their business.

Financials: if a company has anything to do with money, it belongs here. Banks, consumer finance, insurance, you name it. If Investable was publicly traded, we’d probably be here too. As money rules the world, financial companies are heavily tied to the health of the economy. The financial sector can power booms, but can grind to halt if the world hits the skids.

Information Technology: colloquially, this sector is where all the “tech bros” live. Most of the companies in Silicon Valley can be found here, as well as any and all software and hardware companies that make the interconnected world go round. As hosts of companies on the cutting edge of the world (think artificial intelligence), this sector typically grows much faster than peers, with investors willing to pay more for what the future has in store. Due to the nature of their business and services, Technology sector is less tied to the global economy than others.

Communication Services: this sector connects the world in terms of communication in terms of telecom, media, and digital content. Back in the day, this industry was dominated by mega TV stations and telephone companies. Now, they’ve been replaced by search engines, digital media providers, and cell phone companies. Most dominant businesses in this sector have spent decades investing in their infrastructure, therefore often enjoy some form of immutable competitive advantage and tend to generate tons of cash.

Utilities: companies in this sector provide basic necessities like gas, electricity, and water to households and businesses. They are the proverbial “grid” that powers the world. Utilities are like the dinosaurs of investment sectors, having spent a zillion dollars building out their network, and now collecting monthly dues from businesses and customers. Relative to other sectors, utility stocks are fairly predictable which is good in terms of cash flow, but bad in terms of limited upside. Utilities also tend to pay attractive dividends to shareholders.

Real Estate: you guessed it. Finished goods in the form of properties reside here. This includes real estate operators, but also investment pools known as Real Estate Investment Trusts (REITs). Think of REIT operators as collectors of different income-producing properties that sell shares to investors. As rents are collected, REITs pay out portions of those dues to investors. While attractive for its income stream, the Real Estate sector does have sensitivity to the economy in certain segments such as commercial, which depends on the ability to find corporate tenants on a large scale.

Within the S&P 500, not all sectors are created equal. The Information Technology sector is nearly one-third of the entire index, while Utilities, Real Estate and Materials are barely a blip on the radar. Sector representation does not always stay constant, as different types of businesses may fare better in certain parts of the economic cycle. For example, if oil and gas prices skyrocketed, the Energy sector would probably be greater than 3%. Further, if a tech giant like Microsoft went bust (unlikely), the IT sector would probably deflate below its current proportion. As an investor in an index fund that tracks the S&P, you are just along for the ride, ebbing and flowing with these changes in sector representation. Remember, the S&P 500 is a market-weighted index, so each sector’s representation depends on the actual trading value of its constituent members.

Alternatively, many sector-specific ETFs exist, allowing investors to decide for themselves which sectors they want to focus on. If someone just loves the idea of investing in world-class chocolatiers, a Consumer Staples ETF is surely available. Similarly, if you only wanted to invest in the IT or Materials sector, have at it. With sector ETFs, an investor can decide how to allocate their money, as opposed to a broad market fund (i.e., S&P 500 ETF) that does the work for you. However, take note that piecemealing sector ETFs in a DIY manner is a form of active management. By going against the grain by choosing your own investments, you may or may not perform as well as the market. Chances are it’ll be a bit better or worse.

While we won’t advocate for or against sector-specific investing, we will make the humble point that putting all your eggs in one basket isn’t an optimal strategy. The beauty of a broad market fund is the automatic diversification it provides. If Consumer Discretionary tanks, at least you have sectors like Energy and Health Care to potentially limit the damage. But by buying too much of one sector, you risk not having enough of a different one, putting your portfolio at odds with the venerable Mr. Market.