What Is the Global Industry Classification Standard (GICS)?
The Global Industry Classification Standard (GICS) is a hierarchical classification system designed to categorize publicly traded companies into relevant economic sectors and industries. Developed within the realm of Portfolio Management and broader Market Analysis, GICS provides a standardized framework that enables Financial Professionals to analyze companies, perform peer comparisons, and construct diversified portfolios globally. It segments the entire equity market into a defined structure, facilitating consistent Investment Research and Asset Allocation strategies. The GICS framework ensures that companies with similar principal business activities are grouped together, regardless of their geographic location.
History and Origin
The Global Industry Classification Standard (GICS) was jointly developed in 1999 by MSCI and S&P Dow Jones Indices.17, 18 This collaboration aimed to create a universally accepted classification system for the global financial community, addressing the need for accurate, consistent, and complete industry definitions in the context of Equity Investments. Prior to GICS, various regional and national classification systems existed, such as the Standard Industrial Classification (SIC) codes in the United States, which were not always suitable for the evolving global equity markets and investment analysis. The GICS system was designed to enhance the investment research and asset management process for financial professionals worldwide, providing a more robust and flexible tool for defining industries and classifying securities.15, 16
Key Takeaways
- GICS is a four-tiered hierarchical system that classifies companies based on their principal business activity.
- It consists of 11 sectors, 25 industry groups, 74 industries, and 163 sub-industries, allowing for granular analysis.14
- The system is a crucial tool for Benchmarking, portfolio construction, and performance measurement in global financial markets.
- GICS undergoes annual reviews by MSCI and S&P Dow Jones Indices to ensure it remains relevant and reflective of changes in the global economy and industries.12, 13
- Its market-oriented approach focuses on how companies derive their revenue and how their products and services are purchased by consumers, rather than solely on their production processes.11
Interpreting the Global Industry Classification Standard (GICS)
GICS is interpreted through its hierarchical structure, which provides increasing levels of granularity. At the broadest level, companies are assigned to one of 11 Sector classifications, such as Information Technology or Healthcare. Each sector is then divided into more specific Industry Groups, then further into Industryies, and finally into highly detailed Sub-Industry classifications. This structured approach allows investors to understand a company's primary business operations and its competitive landscape. For example, knowing a company's GICS sub-industry helps identify direct peers for comparative analysis, enabling more informed investment decisions. This consistency across global markets is a core benefit of GICS.
Hypothetical Example
Consider an investor evaluating two technology companies: "Global Software Solutions Inc." and "Innovate Semiconductors Corp."
- Global Software Solutions Inc. primarily develops and licenses enterprise software. Under the GICS framework, it would likely be classified within the:
- Sector: Information Technology
- Industry Group: Software & Services
- Industry: Software
- Sub-Industry: Application Software
- Innovate Semiconductors Corp. designs and manufactures integrated circuits. Its GICS classification would be:
- Sector: Information Technology
- Industry Group: Semiconductors & Semiconductor Equipment
- Industry: Semiconductors
- Sub-Industry: Semiconductors
By using the Global Industry Classification Standard, the investor can immediately understand that while both companies belong to the broader Information Technology sector, their specific business models and competitive environments differ significantly at the Sub-Industry level. This distinction is crucial for accurate Investment Research and comparison.
Practical Applications
The Global Industry Classification Standard (GICS) is widely applied across various facets of the financial industry. It forms the basis for constructing sector-specific Exchange-Traded Funds (ETFs) and Index Funds, allowing investors to gain targeted exposure to specific segments of the economy. For instance, many large asset managers offer ETFs that track GICS sectors, providing investors with diversified access to industries like healthcare or energy. State Street Global Advisors is one example of a firm that leverages GICS for its sector-based investment products.
Furthermore, GICS is essential for Asset Allocation strategies, enabling portfolio managers to diversify their holdings across different economic cycles and reduce concentration risk. It also plays a significant role in Benchmarking portfolio performance, allowing investors to compare their returns against relevant industry or sector indices. Analysts widely use GICS to identify peer companies for valuation and competitive analysis, contributing to more robust Market Analysis.
Limitations and Criticisms
Despite its widespread adoption, the Global Industry Classification Standard (GICS) faces certain limitations and criticisms. One common critique is that its classification can sometimes lag behind rapid technological advancements and evolving business models, potentially misrepresenting companies that operate across multiple traditional industries or pioneer entirely new ones. For instance, a company might derive revenue from diverse sources that don't fit neatly into a single Sub-Industry, leading to potential misclassification.
Another point of contention is the subjective nature of assigning a company to its primary business activity. While GICS typically uses revenue as the primary determinant, market perception and future growth areas can also influence classification, leading to different interpretations. Some researchers have noted that classification schemes can be prone to inconsistency and misclassification, failing to fully adapt to the complexities of modern business data. Additionally, reclassifications, though infrequent, can lead to shifts in sector weightings within indices, which may trigger trading activity by passive funds and influence stock prices. For instance, the 2016 reclassification that carved out the Real Estate sector from Financials led to significant market shifts.10
Global Industry Classification Standard (GICS) vs. Industry Classification Benchmark (ICB)
The Global Industry Classification Standard (GICS) and the Industry Classification Benchmark (ICB) are two of the most prominent industry classification systems used globally, both designed to categorize companies for investment analysis. While both systems share the common goal of providing a structured framework for industry categorization, they have distinct origins and methodologies.
GICS, as discussed, was developed by MSCI and S&P Dow Jones Indices. Its methodology focuses on a company's principal business activity, typically determined by revenue, but also considering earnings and market perception. GICS maintains a four-tiered structure: Sector, Industry Group, Industry, and Sub-Industry.9
In contrast, the Industry Classification Benchmark (ICB) is managed by FTSE Russell, a subsidiary of the London Stock Exchange Group. ICB also employs a four-tiered hierarchy, though its terminology differs slightly: Industry, Supersector, Sector, and Subsector.8 The primary method for ICB classification typically relies on a company's main source of revenue as reported in audited accounts. While both systems aim for universality and regular review, their specific definitions, number of categories at each level, and the precise assignment rules can lead to a company being classified differently under GICS versus ICB. This can sometimes create confusion for investors and analysts comparing data classified under different benchmarks.
FAQs
How many levels are there in the GICS hierarchy?
The GICS framework consists of four levels: Sector, Industry Group, Industry, and Sub-Industry. Each level provides a more granular view of a company's business activities.7
Who uses GICS?
GICS is widely used by Financial Professionals including portfolio managers, investment analysts, asset owners, and index providers. It serves as a standard for investment research, portfolio construction, Benchmarking performance, and developing financial products like Exchange-Traded Funds (ETFs).5, 6
How often is GICS updated?
The GICS structure undergoes an annual review process by MSCI and S&P Dow Jones Indices to ensure it accurately reflects changes in the global equity markets and economic landscape. This ensures its continued relevance for Investment Research.3, 4
Is GICS the only industry classification system?
No, GICS is not the only system. Other notable industry classification systems include the Standard Industrial Classification (SIC) codes, still used by some U.S. government agencies like the SEC.gov2, the North American Industry Classification System (NAICS), and the Industry Classification Benchmark (ICB). While GICS is widely adopted in the investment community, different systems serve different purposes.1