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Global Industry Classification Standard (GICS) Explained

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What is Global Industry Classification Standard (GICS)?

The Global Industry Classification Standard (GICS) is a standardized system for categorizing and classifying companies and securities based on their primary business activities. It was developed by MSCI (formerly Morgan Stanley Capital International) and S&P Dow Jones Indices to provide a common framework for investors to analyze and compare companies across global financial markets. GICS is widely used by investors, analysts, and financial professionals to organize and understand the global investment landscape.

Key Components of GICS:

  1. Sectors:
    • GICS organizes companies into 11 broad sectors based on their primary business activities. These sectors are:
      1. Energy
      2. Materials
      3. Industrials
      4. Consumer Discretionary
      5. Consumer Staples
      6. Health Care
      7. Financials
      8. Information Technology
      9. Communication Services
      10. Utilities
      11. Real Estate
  2. Industry Groups:
    • Each sector is further divided into industry groups, providing a more detailed level of classification. For example, the Information Technology sector includes industry groups such as Software & Services, Technology Hardware & Equipment, and Semiconductors & Semiconductor Equipment.
  3. Industries:
    • Industry groups are further broken down into specific industries. For instance, within the Information Technology sector and the Software & Services industry group, there are industries like Application Software, Systems Software, and IT Consulting & Other Services.
  4. Sub-Industries:
    • The most granular level of classification is sub-industries, which represent specific business activities within industries. Sub-industries provide detailed information about a company’s line of business. For example, within the Application Software industry, sub-industries could include Enterprise Software, Internet Software & Services, and Home Entertainment Software.

Benefits of GICS:

  1. Consistency and Standardization:
    • GICS provides a consistent and standardized framework for classifying companies globally, allowing for easier comparison and analysis.
  2. Global Applicability:
    • GICS is designed to be applicable across different countries and regions, making it a useful tool for investors with diversified portfolios.
  3. Investment Decision-Making:
    • Investors use GICS to make informed investment decisions by analyzing the performance and trends within specific sectors, industry groups, or industries.
  4. Benchmarking:
    • GICS is often used as a basis for constructing and comparing performance benchmarks for various sectors, facilitating benchmarking of investment portfolios.
  5. Communication and Reporting:
    • GICS simplifies communication and reporting of investment information among financial professionals, researchers, and market participants.
  6. Risk Management:
    • GICS can aid in risk management by allowing investors to assess exposure to specific sectors or industries within their portfolios.

Updates to GICS:

  • GICS is periodically reviewed and updated to reflect changes in the global economy and business landscape. New industries or sectors may be added, and existing classifications may be adjusted to better align with current market trends.
  • For example, in 2018, the Communication Services sector was introduced as a result of reclassifying certain companies from the Information Technology and Consumer Discretionary sectors.

Understanding GICS classifications is essential for investors seeking to build diversified portfolios and analyze the performance of different sectors within the global equity markets. It provides a structured and consistent framework for organizing vast amounts of financial information.

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