Key Takeaways
- Hierarchical system classifying companies by business activity.
- Consists of 11 sectors down to 163 sub-industries.
- Used globally for consistent investment and portfolio analysis.
- Reviewed annually and adapts to industry changes.
What is Global Industry Classification Standard (GICS)?
The Global Industry Classification Standard (GICS) is a comprehensive industry taxonomy created by MSCI and Standard & Poor's to classify companies globally by their principal business activities. This standardized framework facilitates consistent analysis and comparison across sectors and industries worldwide.
GICS organizes companies into a hierarchical structure that reflects the modern economy, enabling investors to assess performance and trends effectively.
Key Characteristics
GICS offers a universal and adaptable system for categorizing companies with the following features:
- Hierarchical structure: Four tiers including 11 sectors, 25 industry groups, 74 industries, and 163 sub-industries.
- Single classification: Each company is assigned to one sub-industry based on its main business activity, which determines its higher-level categories.
- Regular updates: MSCI and S&P Dow Jones Indices review classifications annually and adjust for significant corporate events.
- Global consistency: Applies equally across developed and emerging markets for accurate sector and industry comparisons.
- Investment research standard: Widely used for portfolio management and factor investing strategies.
How It Works
GICS classifies companies primarily by analyzing their revenue sources, supplemented by earnings and market perception data. This ensures companies like those in earnings reports are appropriately categorized for meaningful analysis.
The system's four-tier hierarchy allows investors to drill down from broad market sectors to specific sub-industries, enabling precise portfolio segmentation and performance attribution. This structure supports diverse strategies, including sector rotation and risk management.
Examples and Use Cases
GICS is instrumental for investors and analysts by offering clear industry classifications for companies and sectors:
- Airlines: Delta and American Airlines are classified under the Transportation sector, aiding comparative analysis.
- Consumer goods: Companies like Coca-Cola fall within Consumer Staples, helping identify defensive stocks in your portfolio.
- ETF construction: GICS sectors guide the selection of the best ETFs for targeted industry exposure.
- Dividend analysis: Investors can leverage GICS classifications to explore opportunities among the best dividend stocks within specific sectors.
Important Considerations
While GICS provides a robust framework, you should note that classification depends heavily on a company's primary revenue source, which can shift over time. Staying updated on reclassifications is crucial for accurate portfolio analysis.
Additionally, understanding how GICS fits with other valuation metrics such as discounted cash flow (DCF) models can enhance your investment decisions by integrating sector insights with company fundamentals.
Final Words
GICS provides a standardized framework that sharpens your industry analysis and portfolio insights. Use it to benchmark sector exposures and identify opportunities across markets for more informed investment decisions.
Frequently Asked Questions
GICS is a hierarchical industry taxonomy developed by MSCI and Standard & Poor's in 1999 to classify companies based on their principal business activities, providing a consistent global framework for industry analysis.
GICS is organized into four tiers: 11 sectors, 25 industry groups, 74 industries, and 163 sub-industries, allowing for detailed analysis from broad sectors down to specialized sub-industries.
Companies are assigned to a single GICS sub-industry primarily based on their revenue sources, with earnings and market perception also considered, which then determines their placement in the corresponding industry group and sector.
The 11 GICS sectors include broad areas like Energy, Materials, Industrials, Consumer Discretionary, and Consumer Staples, reflecting the various segments of the modern global economy.
GICS was created to provide the global financial community with a single, consistent classification system to aid in portfolio analysis, peer comparison, opportunity identification, performance analysis, and investment strategy development.
S&P Dow Jones Indices and MSCI review the GICS framework annually to ensure it stays current, with individual company classifications updated as needed following significant corporate events.
GICS is universal, accurate, flexible, and adaptive, allowing consistent classification across developed and developing markets, making it the standard for portfolio management and asset allocation worldwide.
Investors use GICS to analyze sector trends, compare industry exposures against peers or indexes, identify investment opportunities, evaluate performance contributions, and develop sector-based strategies.
