BullLabs.com publishes stock market sector and industry indices. Our US Total Market Composite Index publication contains indices calculated based on 5,700+ public trading companies on the NYSE, NASDAQ and AMEX. Indices are categorized into Sector and Industry Groups and the composition weight of each company is adjusted periodically based on market caps. This allows investors to benchmark the performance of investment based on specific stock market sectors or industries.
The entire publication contains index calculations made from various classifications, which include different ways to classify stocks into sectors and industries. For example, the General Electric Company (GE) may be listed under the “Consumer Electronics/Appliances” industry from the “Consumer Durables” sector in one classification, and then listed on the “Diversified Industrials” industry from the “Industrials” sector in another classification.
Just as all stocks tend to move based on the underlying factors that drive the overall market, stocks in a similar industry tend to move based on underlying factors that impact the industry. One of the most basic methods for understanding the risk of an investment portfolio is to determine its sector breakdown. Is the portfolio spread across different industrial sectors or is it concentrated in just a few? This provides a good indication of how an investment portfolio will respond to macroeconomic factors or industry trends.
Market sector and industry indices are also essential tools for the sector rotation investment strategy. A rotation strategy is very similar in approach to tactical asset allocation, but rather than asset classes, the investor will allocate his funds to specific sectors or industries depending on the short-term view. The investor will overweight the sectors or industries that he or she believes will outperform and underweight those expected to underperform.
Sector and industry information are very important not only for the underlying research that drives the rotation strategy but also in its implementation. Companies in the same or similar industries are analyzed in a similar fashion. Understanding the industry is very helpful when valuing companies because different industries might have more useful valuation metrics than others. In some industries, cash flow or EBITDA might be more relevant than earnings in stock valuation. As such, comparing companies from the same industry is easier - it is not a coincidence that equity research analysts generally cover companies that are in the same industry.