What is sector allocation?

Sector allocation shows how a portfolio's investments are divided across industries — technology, financials, health care, industrials, energy and so on. It reveals bets that a list of holdings hides: a portfolio of twelve stocks can be spread over twelve companies and still be almost entirely a bet on one industry.

Most data providers use the Global Industry Classification Standard (GICS), which divides the stock market into 11 sectors: information technology, financials, health care, consumer discretionary, industrials, communication services, consumer staples, energy, materials, utilities and real estate.

How the weights are calculated

Individual stocks are each assigned to one sector. Funds are split by the sectors of the companies they hold — a look-through. The weight of sector $s$ is then:

w_s = \frac{\sum_i V_i \, f_{i,s}}{V_{\text{total}}}

where $V_i$ is the value of holding $i$ and $f_{i,s}$ the share of that holding in sector $s$ : 1 or 0 for a single stock, a fraction for a fund.

A simple illustration

A portfolio of €60,000 holds €40,000 in a world equity ETF with 25% in technology, and €20,000 in individual technology stocks:

w_{\text{tech}} = \frac{40{,}000 \times 0.25 + 20{,}000}{60{,}000} = \frac{30{,}000}{60{,}000} = 50\%

Half the portfolio is in one sector — twice the world market's share — even though two thirds of it is in a broad index fund.

How to read it

The natural comparison is the sector split of the world stock market, which is roughly what a global index fund holds. In recent years information technology has made up around a quarter of the market, followed by financials at around a sixth, and industrials, health care and consumer discretionary at around a tenth each.

Over-weight sectors make the portfolio more sensitive to that industry's cycles and shocks.
Missing sectors are bets too. A portfolio without energy or utilities also lacks the protection those sectors have sometimes given in downturns.
Sectors behave differently through the economic cycle. Cyclical sectors such as industrials and consumer discretionary rise and fall with the economy; defensive ones such as consumer staples, health care and utilities tend to hold up better in recessions.

Limits

Classifications are imperfect. A large internet company can be classed as communication services or consumer discretionary rather than technology, and a conglomerate that earns money in several sectors is assigned to only one.
Fund data lags. Look-through figures depend on the holdings a fund last published.
Sectors are only one dimension. A balanced sector split can still be concentrated in one country or a handful of very large companies.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

What is my allocation by sector?

Here is your allocation by sector.

Sector	Value (EUR)	Weight (%)
Technology	40.661,29 €	29,26%
Consumer Cyclical	23.464,16 €	16,88%
Unclassified	17.833,45 €	12,83%
Financial Services	14.700,14 €	10,58%
Crypto	8.847,77 €	6,37%
Cash	8.000,00 €	5,76%
Industrials	7.490,90 €	5,39%
Consumer Defensive	6.553,98 €	4,72%
Communication Services	3.873,62 €	2,79%
Healthcare	3.436,11 €	2,47%
Energy	1.744,75 €	1,26%
Basic Materials	1.634,28 €	1,18%
Real Estate	747,03 €	0,54%

This breakdown reflects only the 87,17% coverage currently available; the Unclassified bucket is 12,83% (17.833,45 €).

See these numbers for your own portfolio

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