Global Industry Classification Standard (GICS)

The Global Industry Classification Standard (GICS) is an industry taxonomy developed in 1999 by MSCI and Standard & Poor’s (S&P) for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries. The classification facilitates a standardized framework that enables market participants to compare companies around the world within the same industry.

History of GICS

In the late 1990s, the financial community faced a need for a comprehensive and standardized system that would allow better industry comparison and economic analysis. Developed by Morgan Stanley Capital International (MSCI) and Standard & Poor’s (S&P), GICS was introduced to fill this gap. The main motivation behind GICS was to develop a system that was easily understandable, consistent, and globally accepted. Over the years, GICS has become the most widely used classification system, providing clear industry definitions for investors and analysts.

Structure of GICS

GICS is hierarchically structured to provide four levels of classification: sectors, industry groups, industries, and sub-industries. The hierarchical structure is as follows:

  1. Sectors (11)
  2. Industry Groups (24)
  3. Industries (69)
  4. Sub-Industries (158)

1. Sectors

The first level of the GICS hierarchy, sectors, is designed to group companies within broader categories that reflect shared economic and social characteristics. The 11 GICS sectors are:

  1. Energy
  2. Materials
  3. Industrials
  4. Consumer Discretionary
  5. Consumer Staples
  6. Health Care
  7. Financials
  8. Information Technology
  9. Telecommunication Services
  10. Utilities
  11. Real Estate

2. Industry Groups

Each sector is divided into industry groups based on shared operational characteristics. For example:

3. Industries

The third level details the industry groups further into more finely tuned industries. Examples include:

4. Sub-Industries

At the most granular level of GICS are sub-industries. For instance:

Each level of classification provides increasing specificity, allowing investors to perform detailed financial analyses and make more informed investment decisions.

Importance of GICS in Algo-Trading

Algo-trading, or algorithmic trading, relies heavily on the ability to categorize and analyze large sets of data efficiently. The standardized format provided by GICS offers several benefits to algo-traders:

  1. Data Consistency: Using GICS ensures that data is uniformly categorized, aiding in the development of trading models.
  2. Comparative Analysis: Standardized industry definitions allow for more accurate comparisons of performance metrics across companies and sectors.
  3. Sector-based Strategies: GICS facilitates constructing sector-based trading strategies, allowing traders to focus algorithms on specific sectors or industry groups.
  4. Backtesting: Historical backtesting of trading algorithms becomes more straightforward with standardized data classification, providing robustness and reliability to the models.

Applications of GICS

Various trading platforms, research firms, and financial institutions use GICS for diverse applications.

Trading Platforms

Most trading platforms integrate GICS into their systems, allowing traders to filter stocks and financial instruments based on GICS classifications. This incorporation aids in quick decision-making and strategy development. Examples include:

Research and Analysis

Financial analysts use GICS for in-depth research and analysis. The classification system supports generating industry-specific reports, sector reviews, and economic outlooks.

Financial Products

GICS aids in constructing financial products such as sector-based ETFs (Exchange-Traded Funds). By defining sector boundaries, GICS ensures that ETFs are accurately representative of the sectors they are meant to track.

Benchmarking

GICS allows performance benchmarking of investment portfolios against standard market indices like the S&P 500, MSCI World, etc. Accurate classification enables meaningful comparisons and performance attribution.

Evolution and Updates

GICS is continually evolving to reflect the changing landscape of global markets. MSCI and S&P regularly review the classification system, considering market trends and industry developments. These reviews ensure that GICS remains a relevant and practical tool for investors.

Historical Changes

Recent Changes

For the latest updates and methodologies, market participants can refer to the MSCI and S&P official sites:

Challenges and Criticisms

Despite its widespread acceptance, GICS is not without criticisms:

  1. Rigidity: Some critics argue that the fixed structure may not adapt quickly enough to emerging industries.
  2. Granularity: Others feel that certain sectors may require more granularity to reflect evolving technologies and market diversities adequately.
  3. Subjectivity: Decisions on classification can sometimes appear subjective, potentially leading to inconsistencies.

However, the ongoing updates and reviews aim to address these challenges and maintain GICS’s robustness and reliability.

Conclusion

The Global Industry Classification Standard (GICS) is a critical framework in the financial industry, providing a standardized method for categorizing companies. Through its hierarchical structure, GICS enables clear, consistent, and comprehensive analysis, which is invaluable for algo-traders and the broader financial community. As global markets evolve, GICS continues to adapt, ensuring it remains a relevant and powerful tool for financial analysis and trading. The adoption of GICS by trading platforms, research analysts, and financial product developers underscores its significance in facilitating systematic and informed financial decision-making.