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What are GICS?
What’s important to know about it?
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What Are GICS
GICS is an acronym for Global Industry Classification Standard representing a system where companies are assigned to specific industries and sectors.
In other words, GICS allows us to classify companies into a particular sector or industry based on their business operations.
This GICS system is intended to organize companies by industry, sector, or sub-industry allowing investors and the market to analyze and compare companies.
This system was originally developed by Morgan Stanley Capital International and Standard & Poor’s.
Today, GICS is used by the investment community around the world for various purposes.
As of the writing of this article, the GICS includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.
Keep reading as I will further break down the meaning of GICS and tell you how it works.
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Why Are GICS Important
In the investment community, it’s important to have an objective system allowing investors to qualify companies so they can better manage their investment strategies.
Although companies are unique in their business operations, they may still be impacted by various economic factors in the same way.
As such, the Global Industry Classification Standard (GICS) allows investors to classify companies in various sectors and industries in an objective and unbiased fashion.
Today, GICS represents a key framework in the investment community across the world.
This is the case because the system is used worldwide, it adequately reflects the current state of all industries, it’s flexible enough to classify companies from sectors all the way to sub-industries, and it can be changed over time.
In 1999, the GICS framework was adopted to replace the previous classification frameworks such as the Standard Industry Classification (SIC).
The SIC was introduced in 1937 and was not able to keep up with the rapid changes in business and the economy.
To avoid relying on potentially inaccurate industry classifications, Standard & Poor’s along with Morgan Stanley Capital International go together to define a new classification system that is objective and can classify companies based on current business and economic advancements.
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What Is The GICS Framework
The Global Industry Classification Standard, or GICS, is a four-tiered classification system where companies are classified based on their Sector, Industry Group, Industry, and Sub-Industry.
Although every company is unique in its business operations, GICS assesses companies both qualitatively and quantitatively to assign them to different tiers.
Company revenues represent a key factor in assigning a company to a particular tier but market perception and earnings are also taken into account.
Currently, there are 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.
The 11 sectors are energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, communication services, utilities, and real estate.
What’s interesting about the GICS framework is that it is flexible and evolves over time.
For instance, there have been a number of changes made to the GICS classification since 1999 where sectors were added, renamed, or even expanded.
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GICS Usage In The Market
Many use GICS to identify and analyze companies in the market.
Investors, financial analysts, and many market participants use GICS to define investment strategies, compare companies, and make various decisions.
GICS is used across the full spectrum of equity market investing, such as asset management, portfolio strategy, peer analysis, sector research, and more.
Since it is a widely accepted framework for investment research, portfolio management, and asset allocation, the GICS methodology is considered objective and unbiased.
There are more than 26,000 companies classified by GICS making it a highly valuable industry classification system.
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GICS vs ICB
What is the difference between the Global Industry Classification System (GICS) and the Industry Classification Benchmark (ICB)?
In essence, GICS and ICB are competing frameworks used to classify stocks and companies in different sectors and industries.
GICS is a framework maintained by Standard & Poor’s along with Morgan Stanley Capital International whereas ICB is maintained by the Dow Jones and FTSE Group in London.
Fundamentally, GICS and ICB are similar and can be used as objective classification systems.
At higher levels of classification, the biggest difference between GICS and ICB is in the classification of businesses in the consumer space where you have classifications such as cyclical, noncyclical, consumer discretionary, and consumer staples.
At lower levels of classification, you may find more differences in how companies are classified but ultimately, it may not have a significant outcome in market participant decision-making.
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So there you have it folks!
What does GICS mean?
In a nutshell, the Global Industry Classification System (GICS) is a stock classification system developed to contribute to enhanced transparency and efficiency in the investment process and decision-making.
GICS was developed in 1999 by S&P and MSCI based on important consultations with market participants such as investment advisors, analysts, portfolio managers, and other participants.
All major public companies are classified into a framework consisting of 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.
This framework is widely accepted and used as it is regularly updated to account for changes in the business world.
For instance, since 1999, there have been two changes made at the sector level where the real estate industry was added in 2016 and the telecommunications services was renamed to communication services in 2018.
Now that you know what GICS means and how it works, good luck with your research!
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