Over the next week, Cboe will roll out options on 11 Select Sector indices. Cboe’s Select Sector Index options are designed to provide investors with an easy way to add specific U.S. industry sector exposure to their portfolios and are expected to have particular utility for investors seeking an alternative to options on ETFs.
The Select Sectors use the GICS® (Global Industry Classification Standard) to categorize each company within the S&P 500 Index into one of 11 sectors. The three largest Select Sectors, by weight, are Technology, Health Care and Financials, pointing to a shift toward a services-oriented U.S. economy, rather than a manufacturing-oriented economy.
Weightings for Select Sectors
Think gold, silver, steel, copper, aluminum, paper products and chemicals. This sector includes companies involved in the discovery, development and processing of raw materials. Earnings for companies in this sector are heavily dependent on commodity prices. The Materials sector may be positively affected by increased demand from developing countries that are building new infrastructure and lessened frugality, which will lead to improved growth. The sector may be negatively impacted by decreased demand from China – in part due to larger inventories there – increased labor costs fueled by a skilled labor shortage and concern that ongoing trade disputes will escalate into a trade war.
The U.S. is a leader in the production and supply of energy and is also one of the largest energy consumers in the world. Companies in the Energy sector produce oil, natural gas, coal, renewable fuels and electricity from clean energy sources like wind, solar and nuclear power. There is a competitive workforce and supply chain within the sector and companies use innovative products and technologies. Energy was the worst performing sector during the last few months of 2018 but improved at the start of 2019. The sector may be positively affected by a potential increase in energy demand, due to a growing U.S. economy and developing nations’ need for energy as they build new infrastructure. The Energy sector may be negatively affected by an increased push for conservation, combined with new technology, which could impact the demand for energy products.
Companies in the Industrials sector are involved in the manufacturing and distributing of capital goods, providing commercial services and supplies or providing transportation services. The industries included range from aerospace and defense, road and rail to construction and engineering, machinery and building products, with several industries in between. Manufacturing in these industries is decreasing globally but expanding in the U.S., however, the Industrials sector is globally oriented and could be impacted by the ongoing trade issues between the U.S. and China. The sector could also be affected by companies looking to boost productivity and investing in more efficient equipment, as well as low inventories that will lead to a need for rebuilding. It may be negatively affected by increased interest rates if they are changed in the near future.
The Financials sector includes banks, capital markets, insurance, Diversified Financial Services, thrifts and mortgage finance. The sector has stabilized in the beginning of 2019 and started rebounding in January. The sector may be affected by rising interest rates and improving consumer finances, which will allow consumers flexibility to take on more debt if desired. It may be negatively affected by ongoing trade concerns, a too rapid increase in interest rates and potential changes in legislation, such as increased regulation.
This sector is all about essentials: food and beverages – and the accompanying retail – household and personal products and tobacco. The Consumer Staples sector is seen as a safe bet during bearish times and it has benefited from a recent increase in market volatility. The sector may be positively affected by retailers cutting costs to increase value for customers and improve sales, lower energy prices, giving consumers more spending power, and increased nervousness about the political climate, which may send investors looking for a safety net. The sector could be negatively affected by increased competition, though more mergers and acquisitions may help reduce capacity. It is also possible that ongoing trade disputes could have a negative impact on the sector.
The Real Estate sector includes equity real estate investment trusts and real estate management and development. With home affordability near a 10-year low and a continuing shift to online retail, the Real Estate sector is facing some unique challenges. The sector may be affected by low interest rates, as well as an expanding economy, which could lead to an increase in rental rates. The sector is currently benefiting from a stronger demand for apartments – influenced by the housing crash and changing demographics – but this could eventually lead to an excess and impact the sector negatively. Additionally, rising interest rates may raise the cost of financing and the shift from brick and mortar stores to online shopping may negatively influence the sector.
Industries in this sector include communications equipment, electronic equipment, instruments and components, IT Services, semiconductors and equipment, software and technology hardware and storage. The Technology sector has gone through some large changes recently, as some previously included companies have moved to the Communications sector. The Technology sector may be affected by increased tech spending from companies looking for better efficiency and companies shifting toward a technology based workforce as wages increase. It may be negatively affected by more competition, increased regulation and ongoing trade disputes, which could raise costs for producers and, in turn, raise prices for consumers.
Industries in this sector include gas, electric and water utilities, multi-utilities, independent power producers and electricity producers. The sector may be affected by a better housing market, which has caused an increased need for electricity, as well as attractive dividends. It may be negatively affected by high fixed costs and increased interest rates, which will make the sector less competitive.
Industries in the Health Care sector include biotechnology, health care equipment, supplies and technology, health care providers and services, life sciences tools and services and pharmaceuticals. The cost structure of the Health Care sector has improved recently and demand is on the rise for health care products and services; however, the sector is extremely prone to volatility and could be negatively affected by regulatory uncertainty around the Affordable Care Act, as well as funding concerns as the government looks for ways to curb deficits.
The Consumer Discretionary sector includes all the fun things consumers want to buy, but, unlike Consumer Staples, don’t necessarily need to buy. Industries in this sector include automobiles and auto components, diversified consumer services, hotels, restaurants and leisure products, multiline and specialty retail, textiles, apparel, luxury goods and more. The sector is currently benefiting from tighter labor markets and higher wages but consumers are still cautious about spending and competition in the retail space is greater. However, a low unemployment rate, low interest rates and rising wages point to strong consumerism on the horizon. The sector may also be affected by ongoing trade disputes and indications that millennials have different spending habits than previous generations.
The Communications Services sector, just added in 2018, includes diversified telecommunications services, entertainment, interactive media and services, traditional media and wireless telecommunication services. Leaders in the sector may be reaching their saturation point, which could lead to a slowdown in growth as many people already use these services. However, there is an increase in demand for wireless technology and the addition of 5G technology is boosting interest. Advertisers are also being lured to the sector by the ability to better target consumers. Despite these areas of opportunity, the sector may be negatively affected by greater expenses and staying competitive requires faster network speeds and stricter regulation as the government looks into companies’ collection of personal user data.
NOW WHAT? MORE INFORMATION
Now that you know all about the sectors, learn how you can use Cboe’s Select Sector Index options in portfolio management at www.cboe.com/sectors.
Information in this blog was sourced from Charles Schwab and Fidelity.