Sector

What Is a Sector?

A sector is a broad segment of the economy made up of businesses that engage in similar or related activities. Economists and investors use sectors to classify economic activity, compare companies, and track which parts of the economy are expanding or contracting.

Key Takeaways

• Sectors group companies by similar business activities, aiding economic analysis and investment decisions.
• The four main economic sectors are primary, secondary, tertiary, and quaternary.
• Financial markets break these into narrower investment sectors (e.g., technology, energy, financials).
• Sector performance varies with the economic cycle; investors use sector analysis and sector ETFs to target exposure or rotate positions.

The Four Main Economic Sectors

Primary Sector

Involves extraction and harvesting of natural resources.
Examples:
* Agriculture
* Mining and quarrying
* Fishing, forestry, hunting
* Processing and initial packaging of raw materials

Developing economies tend to rely more on primary-sector employment than advanced economies.

Secondary Sector

Transforms raw materials into finished goods through manufacturing and construction.
Examples:
* Automotive and aerospace manufacturing
* Textiles and chemical processing
* Shipbuilding and heavy machinery
* Energy utilities (production and distribution)

Tertiary Sector

Provides services to consumers and businesses.
Examples:
* Retail, transportation, restaurants, tourism
* Banking, insurance, healthcare, legal services
* Entertainment and distribution services

The tertiary sector typically represents the largest share of economic activity in advanced economies.

Quaternary Sector

Covers knowledge-based activities and information services.
Examples:
* Research and development
* Information technology and software
* Education and consulting

The quaternary sector overlaps with the tertiary sector but emphasizes information, innovation, and intellectual services.

Investment (Stock) Sectors

In financial markets, sectors are divided into finer investment categories to compare companies with similar business models. Common investment sectors include:
* Technology (hardware, software, semiconductors)
Financials (banks, insurance, asset managers)
Real Estate (residential and commercial property trusts)
Industrials (machinery, manufacturing, construction)
Energy (oil, gas, renewable energy)
Utilities (electric, water, gas providers)
Consumer Discretionary (non-essential goods and services)
* Consumer Staples (essential goods like food and household products)

Sector ETFs and mutual funds let investors gain diversified exposure to a specific sector.

How Sectors Behave Across the Economic Cycle

Expansion:
* Increased demand for raw materials, energy, manufacturing, construction, and consumer discretionary goods.
* Industrial, energy, and real estate sectors often perform well.

Slowdown:
* Consumer staples and utilities typically show resilience, as demand for essentials remains steady.
* Investors may shift to defensive sectors considered safe havens.

Understanding sector drivers helps investors anticipate which areas may outperform or underperform as conditions change.

Sector Investing and Sector Rotation

• Sector investing focuses on allocating capital to specific economic sectors rather than across the whole market.
• Analysts and funds often specialize by sector for deeper expertise.
• Sector rotation is the practice of shifting investments between sectors in response to economic outlooks or market cycles to seek better returns or reduce risk.
• Sector ETFs are a common tool for implementing sector bets or rotations.

Sector vs. Industry

• Sector: a broad grouping of companies with related economic activities (e.g., primary sector).
• Industry: a narrower category within a sector made up of companies that directly compete (e.g., oil & gas industry within the primary sector).

Companies in the same sector may not compete directly if they operate in different industries within that sector.

Conclusion

Sectors organize economic activity into meaningful groupings that help economists measure growth and investors compare opportunities. From raw-material extraction (primary) through manufacturing (secondary) to services (tertiary) and knowledge work (quaternary), sectors reveal where value is created and how it shifts over time. Using sector analysis, investors can tailor exposures, employ sector ETFs, and rotate between areas of the market in line with economic trends.