Sector Growth Over the Year: What a Sector Index Measures and What It Does Not Show

The site compares sectors over the year by the change in their sector indices: for each sector a basket of its securities is taken, the basket's value is combined into an index, and the value on the current date is compared with the value on the same date a year earlier. The list below is sorted by this change from highest to lowest and is recalculated every time the page is served, so its composition and order today and a week from now may differ.

What exactly is measured

What is measured is the revaluation of a basket of securities, not the business performance of the sector. A sector index is a weighted price: an issuer's contribution to the index is determined by its market capitalisation adjusted for the free-float share of its stock. This leads to the first consequence, and it changes how the list should be read: a sector with a few large issuers moves almost entirely in step with the biggest of them, while small stocks barely register in the index. In this arithmetic, "the sector rose" means "its largest market capitalisation became more expensive", which is not the same as "all the stocks in the sector became more expensive".

The period is a rolling year: from today's date back to the same date of the previous year. A rolling window has the advantage of not being tied to a calendar reporting date, and the drawback that its starting point moves as well. When a sharp slump or spike from last year drops out of the window, a sector's place in the list changes without a single trade in the sector itself — the point of comparison has simply shifted.

Why an index rather than an average across stocks

The average across a sector's stocks and the sector index answer different questions. The average describes a typical stock; the index describes money invested in the sector in proportion to the size of its issuers. To judge "how expensive the sector is relative to its own norm", analysts usually take not the average but the sector median, which is not distorted by outliers. For the question "what would a bet on the sector have returned", the index is the more appropriate measure. The list below answers the second question, and it must not be used as an answer to the first.

What this list does not allow you to conclude

What follows is what the list does not show and where it is easy to draw a false conclusion from it.

The base effect. A high position may reflect not strength but the depth of the fall a year earlier: a recovery after a slump produces the same sign and the same magnitude as genuine growth.

The cause of the rise. A re-rating of the multiple and growth in earnings look identical in the index. A sector may have become more expensive without becoming more profitable — in that case the index gain is explained entirely by buyers agreeing to pay more for the same financial results. This list does not break the change down into these components: that has to be done separately, using the financial statements.

Regulation. For the commodity and financial sectors, the sign of the year is often set not by the market but by the withdrawal or return of part of the margin through the tax manoeuvre. Such a change does not reverse on its own and cannot be read from last year's growth rate.

Basket composition. Indices are rebalanced: an issuer may have entered or left the basket within the window. The year-on-year comparison is therefore not made for an unchanged set of stocks.

How to read the table

The order in the list is the starting point of research, not its result. A useful sequence is as follows.

Step 1 — look at what happened to revenue and profit in the sector: published financial statements show whether the revaluation is backed by results. Step 2 — check the payouts: the sector's dividend statistics and the calendar of upcoming payouts explain part of the gap between the price index and the actual result of holding the stocks. Step 3 — move down from the sector level to the level of individual stocks in the list of shares, because within a sector that has risen there are issuers whose stocks have fallen. Step 4 — look at what lies ahead for the sector in the events calendar: record dates, board meetings and earnings releases set the nearest triggers for price moves.

If you need exposure to a sector as a whole rather than to an individual stock, the same sorting applies to exchange-traded funds; for a comparison with the risk-free alternative, see OFZ yields, which show the return the market offered without taking on sector risk. The terms used in the table are explained in the glossary.

What to do with a specific stock from a sector that has risen

A sector list narrows the search but does not make the choice for you. From there, two independent checks come into play: the quality of the financial statements — a set of formal criteria based on the balance sheet and cash flow that add up to a score under the Piotroski method — and valuation, a calculation using the DCF model, in which most of the result comes from the terminal value and is therefore sensitive to the assumption about the long-term growth rate. A sector that has risen over the year may be both high-quality and already expensive at the same time; a list sorted by index change does not make this distinction.