A number of different classification systems exist to assist portfolio managers in diversifying exposure to industry- or sector-specific risk.

The Industry Classification Benchmark (ICB) and the Global Industry Classification System (GICS) are very popular among practicioners. The two frameworks are reported to be similar in methodology and equivalent in use.

Keep in mind that differences do exist between the two systems. These differences, however, are concentrated around individual sectors and are the result of classification decisions inherent in the methodology. The two methodologies are therefore globally similar and locally different.

Global Industry Classification Standard (GICS)

The Global Industry Classification Standard (GICS ) was developed by MSCI, a premier independent provider of global indices and benchmark-related products and services, and Standard & Poor's (S&P), an independent international financial data and investment services company and a leading provider of global equity indices.

The GICS structure consists of 10 sectors, 24 industry groups, 68 industries and 154 sub-industries into which S&P has categorized all major public companies.

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

Lists of all available industries are call GICS Sectors for Standard and Poor's (S&P500 will use that) and ICB for Dow Jones and FTSE. Hence it used by Nasdaq, Nyse and others markets.

GICS Sectors are now a trademark of Standard and Poor's and then data have to be sought for in S&P's website.

Standard & Poor's and Morgan Stanley Capital International (now known as MSCI Barra) took on the challenge of creating a single, consistent set of global sector and industry definitions to meet the needs of the world financial community. The result was the GICS, which successfully resolves many of the issues with previous classification systems. The GICS is now an accepted framework for investments.

The system is similar to ICB (Industry Classification Benchmark), a classification structure maintained by Dow Jones Indexes and FTSE Group.

GICS and portfolio management

Actively managed portfolios, where the goal is to outperform a benchmark in some way, benefit from this transparency and accuracy as well. In addition, analysts and managers are better able to track emerging markets and identify high-potential niches. Diversification and asset allocation decisions are better informed because of the greater transparency GICS provides, both across industries and among geographical markets.

Industry Classification Benchmark (ICB)

The Industry Classification Benchmark groups companies that have similar primary revenue sources. There are 10 industries, and derived from these in increasingly finer classifications there are 19 supersectors, 41 sectors and 114 subsectors.

Each stock in the investable stock universe is uniquely classified, based on the company's primary revenue source, in one of the 114 subsectors. Consequently, it is automatically and uniquely classified into one of the 41 sectors, one of the 19 supersectors and one of the ten industries.

1. Oil and Gas
2. Basic Materials
3. Industrials
4. Consumer Goods
5. Healthcare
6. Consumer Services
7. Telecommunications
8. Utilities
9. Financials
10. Technology

NASDAQ OMX Adopts ICB Company Classification Standard Globally

NASDAQ OMX has decided to adopt the ICB (Industry Classification Benchmark) standard globally, effective as of February 1, 2012. The NASDAQ OMX exchanges in Stockholm, Copenhagen, Helsinki, Reykjavik, Tallinn, Riga, and Vilnius will adopt ICB which is the current standard on the NASDAQ OMX exchanges in the US.

Yahoo Sector Classification

Yahoo uses the following Sector classification

1. Services
2. Consumer goods
3. Conglomerates
4. Financial
5. Healthcare
6. Industrial Goods
7. Basic Materials
8. Technology
9. Utilities

Under each Sector one could find several Industries.

Why Exchange Traded Funds are so important?

ETFs were initially pitched to institutional investors about 20 years ago, but a growing number of individual investors have been using them since ETFs are often cheaper and more tax friendly than traditional mutual funds.

ETFs are generally believed to represent the behavior of institutional investors, and can be used opportunistically to bet on various indexes.
ETFs allow investors to easily diversity their portfolio. While their interest is growing, individual investors admitted they still have a lot of questions about ETFs and how they work.

Individual investors' appetite for exchange traded funds is growing stronger. Although one reason investors turn to ETFs is for tax benefits, 44% of those surveyed said the top issues they want to learn more about are the exact tax implications associated with owning ETFs.

Investors clearly don't feel like they know as much as they want to about investing in ETFs. But they're learning, and we're making progress and moving in the right direction

Exchange-traded funds are traded on a stock exchange.

They allow individual investors to benefit from economies of scale by spreading administration and transaction costs over a large number of investors.

1. ETF Sectors
2. Inverse ETF: Also known as a "Short ETF," or "Bear ETF to profit from falling prices.
3. Leverage ETF: provide another tool for investors to access leverage in the financial markets.
4. Portfolio Managers

The current breadth of products ranges from indexes to currencies to volatility to commodities to sectors and more

Also helping the growth of ETFs, is the fact that indexing has gone from 7% of investments to 20% in just 10 years. It's a trend that shows the average investor is fed up with actively managed funds falling short of the indexes they're supposed to beat.

SPY

The SPDR S&P 500 ETF (SPY) was the first exchange-traded fund (ETF) launched January 30, 1993 as "the one that started it all," calling the debut of the Spider (short for S&P Depositary Receipt) an investment product that gave people a more precise way to buy and sell an entire index, but could be traded like a stock.

Standard & Poor's breaks stocks into 10 sectors and dozens of industries. Generally speaking, different sectors are affected by different things. So at any given time, some are doing well while others are not.

In most cases, finance, health care and technology tend to be the fastest growing sectors, while consumer staples and utilities offer stability with moderate growth. The other sectors tend to be cyclical, expanding quickly in good times and contracting during recessions.