Global Industry Classification Standard (GICS)
What Is Global Industry Classification Standard (GICS)?
The Global Industry Classification Standard (GICS) is a standardized, four-tiered hierarchical classification system used by the global financial community to assign companies to a specific economic sector and industry group that best defines their business operations. As a crucial tool within investment classification, GICS enables consistent and comparable financial analysis of companies worldwide, supporting effective portfolio diversification and asset allocation strategies. The system categorizes publicly traded companies based on their principal business activity.
History and Origin
The Global Industry Classification Standard was jointly developed in 1999 by MSCI and Standard & Poor's (now S&P Dow Jones Indices) to address the global financial community's need for a complete, consistent set of industry definitions13, 14. Before GICS, various classification systems existed, such as the International Standard Industrial Classification (ISIC) and the North American Industry Classification System (NAICS), but these were not specifically designed for the nuances of equity markets and often overrepresented sectors with few publicly traded companies12. The creation of GICS aimed to provide an efficient investment tool that could capture the breadth, depth, and evolution of industry sectors globally11. Its development involved extensive discussions with asset owners, portfolio managers, and investment research specialists to ensure its utility for financial professionals worldwide10.
Key Takeaways
- GICS is a four-tiered hierarchical system categorizing companies into Sectors, Industry Groups, Industries, and Sub-Industries.
- Developed by MSCI and S&P Dow Jones Indices in 1999, it provides a globally consistent framework for industry classification.
- A company's GICS classification is primarily determined by its main source of revenue, along with earnings and market perception.
- It serves as a standard for benchmarking equity indices and facilitates detailed industry analysis and comparisons for investors.
- GICS undergoes annual reviews to ensure its continued relevance and accurate representation of the evolving global markets.
Formula and Calculation
The Global Industry Classification Standard (GICS) does not involve a mathematical formula or calculation in the traditional sense. Instead, it is a qualitative and quantitative methodology for assigning companies to specific categories. The classification process relies on analyzing a company's primary business activity, with revenue being the most significant factor. Other considerations include the company's earnings and how the market perceives its core operations9. Each company is assigned a single GICS classification at the most granular level, the sub-industries, which then rolls up into its respective Industry, Industry groups, and Sector.
Interpreting the GICS
Interpreting the Global Industry Classification Standard involves understanding its hierarchical structure and how companies fit within it. The system currently comprises 11 Sectors, which are broad categories representing major segments of the economy. These sectors are further broken down into 25 Industry Groups, then 74 Industries, and finally 163 Sub-Industries, which are the most granular classifications. For example, a technology company might be classified under the Information Technology sector, then the Software & Services industry group, the IT Services industry, and finally a specific sub-industry like Data Processing & Outsourced Services. This layered approach allows investors to analyze companies at different levels of specificity, aiding in peer group analysis and understanding market trends within distinct segments of the economy8. The GICS framework is designed to classify a company according to its principal business activity, with revenue being a key determinant7.
Hypothetical Example
Consider a hypothetical investment firm, "Global Growth Advisors," managing a portfolio for a client. The client wants to ensure their portfolio is well-diversified across various economic segments. Global Growth Advisors uses the Global Industry Classification Standard to categorize the holdings.
One company in the portfolio, "SolarTech Innovations Inc.," generates 70% of its revenue from manufacturing solar panels and 30% from developing energy storage solutions. Based on its primary revenue source, SolarTech Innovations Inc. would likely be classified under the Industrials sector, specifically within the Electrical Equipment industry group, Electrical Components & Equipment industry, and potentially the Solar Energy sub-industry.
Conversely, "MediCare Solutions Corp." generates 85% of its revenue from hospital management services and 15% from medical device manufacturing. This company would fall under the Health Care sector, within the Health Care Providers & Services industry group, then the Health Care Facilities industry, and finally the Hospitals sub-industry.
By systematically applying the GICS framework to all holdings, Global Growth Advisors can quickly visualize the portfolio's exposure to different economic sectors and industries, helping them identify areas of concentration or underrepresentation to refine their asset allocation strategy.
Practical Applications
The Global Industry Classification Standard is widely applied across various facets of the financial industry. It forms the basis for constructing and analyzing numerous global equity indices, including those provided by MSCI and S&P Dow Jones Indices5, 6. For investors, GICS enables consistent peer analysis, allowing them to compare companies that genuinely operate in the same core business. This standardization is critical for portfolio managers designing diversified portfolios or implementing sector-specific strategies, whether for passive investing through exchange-traded funds (ETFs) or actively managed funds targeting specific industry groups.
Beyond portfolio management, GICS is used in investment research to identify market trends, conduct performance attribution, and understand the impact of economic shifts on different industries4. Analysts leverage GICS to create custom-tailored portfolios and facilitate meaningful comparisons of sectors globally3. Furthermore, academics and economists utilize the GICS framework for macro-level analysis, examining the performance and interaction of different economic sectors over time, contributing to a deeper understanding of market dynamics. The system covers a vast portion of the world's market capitalization, making it a comprehensive tool for global financial analysis2.
Limitations and Criticisms
While the Global Industry Classification Standard is a widely accepted and valuable tool, it faces certain limitations and criticisms, primarily concerning its ability to classify highly diversified or rapidly evolving companies. Modern corporations often operate across multiple distinct business lines, making it challenging to assign a single, definitive GICS sub-industries classification based on a "principal business activity". For instance, a technology giant might derive significant revenue from e-commerce, cloud computing, and digital advertising, potentially leading to debates over its most appropriate sector.
Critics also point out that the annual review process, while essential for maintaining relevance, means that classification changes can occur, impacting historical data analysis and requiring adjustments for active management and passive investing strategies. The hierarchical structure, while providing granularity, may not always perfectly capture the intricate interdependencies between companies in today's interconnected global economy. Despite these challenges, MSCI and S&P Dow Jones Indices conduct annual reviews to ensure that the GICS structure remains fully representative of today's global markets, adapting to new industries and evolving business models1. Educational resources, such as those provided by the Bogleheads community, often discuss how investors can best interpret and utilize GICS given these nuances.
Global Industry Classification Standard (GICS) vs. Industry Classification Benchmark (ICB)
The Global Industry Classification Standard (GICS) and the Industry Classification Benchmark (ICB) are the two primary rival systems used for classifying companies by industry. Both aim to provide a standardized framework for financial analysis, but they differ in their structure and the number of categories they employ. GICS, developed by MSCI and S&P Dow Jones Indices, utilizes a four-tiered hierarchy (Sectors, Industry Groups, Industries, and Sub-Industries). The ICB, maintained by FTSE Russell, uses a similar four-tiered structure but with different category names and typically a slightly different number of classifications (Supersectors, Sectors, Subsectors, and Segments).
The confusion between the two often arises because both systems classify companies based on their primary revenue sources and are used for index construction and investment research. However, a company classified under a specific sector in GICS might fall into a different, though conceptually similar, category under ICB due to differing methodologies in defining and grouping industries. For example, while GICS has 11 Sectors, ICB has 10 Supersectors. Investors and analysts must be aware of which classification system is being used when comparing data or constructing portfolios to ensure consistency and accuracy in their financial analysis.
FAQs
What are the four levels of GICS classification?
The Global Industry Classification Standard (GICS) consists of four hierarchical levels: Sectors, Industry Groups, Industries, and Sub-industries. Each level offers increasing granularity in defining a company's business activities.
How often is GICS updated?
The Global Industry Classification Standard undergoes an annual review process by MSCI and S&P Dow Jones Indices. This ensures that the classification system remains relevant and accurately reflects the evolution of global industries and market dynamics.
Why is GICS important for investors?
GICS is important for investors because it provides a consistent and standardized framework for classifying companies globally. This allows for meaningful comparisons between companies, facilitates portfolio diversification, aids in asset allocation decisions, and serves as a foundation for constructing and analyzing equity indices.
Does every company have a GICS code?
While the Global Industry Classification Standard covers a significant portion of the world's market capitalization and includes tens of thousands of publicly traded companies, it primarily focuses on listed equities. Therefore, privately held companies or very small, illiquid public companies may not have an assigned GICS code.