What is the industrial goods sector?

The industrial goods sector includes stocks of companies involved in the manufacturing or distribution of capital goods, such as construction, engineering, industrial machinery, commercial services, and electrical equipment. Thanks to the industrial goods sector, we have the buildings we use daily and the tools used to construct those buildings. This industry is sometimes referred to as the capital goods sector.

Definition and Examples of the Industrial Goods Sector

Stocks in the industrial goods sector are stocks of companies within the capital goods sector. These companies may build buildings or manufacture tools and machinery for construction and manufacturing. As of December 2018, this sector represented 9.2% of the S&P 500 Index.

How the Industrial Goods Sector Works

Companies aggregated in the industrial goods sector are involved in manufacturing industrial equipment and building materials, or in construction and engineering operations for buildings. Some examples of sub-industries within this sector include: construction, manufacturing, building products, metal forming, tool production, wood production, aerospace and defense, cement production.

Advantages and Disadvantages of Investing in the Industrial Goods Sector

Advantages

Increased growth with economic expansion: The industrial goods sector thrives when the economy recovers and grows. In strong economies, demand for construction and manufacturing is higher than in recessionary periods. This can lead to significant stock price growth if you can time the market and invest when prices are low.

Ease of understanding: The industrial goods sector is relatively straightforward. When times are good, construction and manufacturing increase, and the industrial sector and profits grow. Beginner investors can easily and quickly research and understand this sector.

Disadvantages

Strongly affected by raw material availability: This sector is sensitive to the availability of raw materials. Even if the economy is growing well, if materials are difficult to obtain or have become more expensive due to trade issues or rising fuel prices, this sector can be severely impacted.

Poor performance during recessions: While understanding that this sector performs well during economic growth and poorly during recessions may seem like an advantage, it is not always the case. When crises occur, such as the 2020 pandemic and recession, this sector may unexpectedly contract and cause investor losses.

What This Means for Individual Investors

The industrial goods sector is typically an industry characterized by relative predictability and economic cycles. This makes it easier for investors to time the buying and selling of industrial goods stocks and funds. Not much research is needed to understand this sector, making it a more accessible industry for investors at all levels.

How to Invest in the Industrial Goods Sector

You can invest directly in the industrial goods sector, or you may choose to invest in the broader industrial sector through exchange-traded funds (ETFs) or index funds, or by purchasing shares in industrial goods companies.

Index funds such as the S&P 500 encompass the entire industrial sector (and other sectors), while the S&P Capital Goods index fund only includes the industrial goods sector. Vanguard and Fidelity also offer specialized funds focused on the sector. If you decide to invest directly in high-performing capital goods companies, you can do so by opening a brokerage account with a platform like TD Ameritrade, Betterment, or Robinhood.

Regardless of your investment strategy, there are always risks to consider. Make sure to carefully research your type of investment and evaluate the pros and cons before investing your money.

Key Takeaways

The industrial goods sector is involved in the production of industrial equipment and building materials, as well as the process of constructing buildings. This sector performs best during economic growth and contracts during recessions. Not much research is needed to understand the industrial goods sector, making it a more accessible industry for investors at all levels.

Not

The Balance offers tax, investment, or financial services and does not provide advice. The information is provided without regard to the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks including the risk of loss of capital.

Source: https://www.thebalancemoney.com/what-is-the-industrial-goods-sector-5201930