Shares are officially classified into 10 broad categories - Financials, Oil & Gas, Basic Materials, Consumer Services, Consumer Goods, Utilities, Healthcare, Telecoms, Industrials and Technology. These broad industry categories are broken down into sectors and sub-sectors. Here’s a link to Wikipedia illustrating how this all pans out
The current weighting for the FTSE All Share is set out in the pie chart
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Because a small number of very large companies dominate the index - Financials (HSBC, Lloyds Bank), Oil & Gas (BP, Shell) and Consumer Goods (tobacco shares, Unilever, Reckitt) are all 'overweight' - it is inevitable that smaller companies represented in the other seven sectors are all 'underweight'.
The vast majority of trackers available to the average retail investor are cap-weighted. For much of the time, this probably does not make a difference, however at the time of the Macondo well disaster in 2010, BP’s market cap was nearly 10% of the FTSE 100 and when its share price fell 50%, it knocked 5% off the value of the FTSE.
Some suggest that because we cannot know which sectors will do well in the future and which will decline, it would be more sensible to operate an equal weighted index. Maybe this is more logical but such an approach would itself not be without drawbacks- for example, it can be argued it gives more prominence to smaller companies which can be more volatile and less resilient to difficult economic conditions compared to the larger companies.
A Look at a Couple of My ITs
Whilst investment managers and small investors in individual companies are of course free to choose the industries they invest in and the weight they give them, investors in trackers have to live with the sector skews of the index. Managers of active funds/trusts will have a plan of what weighting to hold in various sectors. By monitoring these weightings according to market conditions and making adjustments from time to time, they hope to gain an advantage for their investors.
For example, in my holding of Edinburgh investment trust, the current weighting is Consumer Goods 22.1%, Financials 20.1%, Healthcare 20.0%, Industrials 16.7%, Consumer Services 6.3%, Utilities 6.3%, Telecoms 5.7% and Oil/Gas 2.8% - no weighting for Technology or Basic Materials (mostly miners).
The weighting by Nick Train at Finsbury Growth & Income trust is more focussed - Consumer Goods 38%, Consumer Services 28%, Financials 22% and Technology 11% with zero holdings in Basic Materials, Healthcare, Oil/Gas, Industrials, Telecoms and Utilities
With my own shares portfolio I favour Consumer Goods and Consumer Services which together amount to around 60% of my holdings - the only sector I do not hold is Telecoms. Here's how it pans out in my pie chart -
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If you keep track of your portfolio weighting and have a preference for some sectors over others, feel free to leave your thoughts/comments below.