What Is the Industrial Goods Sector?

The Industrial Goods Sector Explained in Less Than 4 Minutes

A quality control engineer inspects a machine in a factory.

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The industrial goods sector includes stocks of companies involved in manufacturing or distributing 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 every day and the tools used to construct those buildings. This industry is sometimes referred to as the capital goods sector.

Investing in U.S. sectors can be a smart way to create a balanced portfolio. But before you begin buying stocks or industrial goods sector funds, you’ll want to understand more about this industry, how it operates, and how it profits.

Definition and Examples of the Industrial Goods Sector

Industrial goods sector stocks are shares of companies within the capital goods sector. These companies might construct buildings, or manufacture tools and machinery for construction and manufacturing purchase. As of December 2018, this sector represents 9.2% of the S&P 500.

A few examples of companies within the industrial goods sector include:

  • Caterpillar (CAT)
  • Corning (GLW)
  • Emerson Electric (EMR)
  • Deere & Company (DE)

The industrial goods sector is a subsector of the larger industrials sector. The industrials sector contains capital or industrial goods, commercial and professional services, and transportation.

How the Industrial Goods Sector Works

Companies grouped in the industrial goods sector are involved in the manufacturing of industrial equipment and building materials, or the construction and engineering of buildings.

A few examples of subindustries within this sector include:

  • Construction
  • Manufacturing
  • Building products
  • Metal fabrication
  • Tool production
  • Lumber production
  • Aerospace and defense
  • Cement production

Pros and Cons of Investing in the Industrial Sector

  • Growth increases as economy grows

  • Easy to understand

  • Strongly impacted by supply availability

  • Performs poorly in times of recession

Pros Explained

  • Growth increases as the economy grows: The industrial goods sector thrives when the economy is recovering and growing. In strong economies, the demand for building and manufacturing is higher than in times of recession. This can lead to tremendous stock growth if you’re able to time that market and get in while prices are low.
  • Easy to understand: The way some sectors work is complicated, but the industrial goods sector is fairly cut and dry. When times are good, building and manufacturing increase and the industrial sector grows and profits. This can be an easy sector for novice investors to research and fully understand quickly.

Cons Explained

  • Strongly impacted by supply availability: This sector is sensitive to the availability of raw materials. Even if the economy is booming, if materials are hard to get or become more expensive due to trade issues or rising fuel prices, this sector can be heavily impacted.
  • Performs poorly in times of recession: While understanding that this sector performs well in times of economic growth and poor in times of recession may seem like a benefit, it’s not always. When a crisis hits, like the 2020 pandemic and recession, this sector may shrink unexpectedly, and can cause investors to lose money.

What It Means for Individual Investors

Typically, the industrial goods sector is a fairly predictable, cyclical industry. This makes it easier for investors to time the buying and selling of industrial good stocks and funds. Little research is required to understand this sector, which could make it a more accessible industry for investors of all levels.

How To Invest in the Industrial Goods Sector

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

Index funds such as the S&P 500 include the entire industrials sector (and other sectors), while the S&P Capital Goods index fund contains just the industrial goods sector. Vanguard and Fidelity also offer sector-specific ETFs. If you decide to invest directly in top-performing capital goods companies, you can do so by opening a brokerage account using a platform such as TD Ameritrade, Betterment, or Robinhood.

No matter your investment strategy, there are always risks to consider. Be sure to research your specific investment type and weigh the pros and cons before investing any of your money.

Key Takeaways

  • The industrial goods sector is involved in the production of machinery and building materials, as well as the building construction process.
  • This sector tends to perform better in times of economic growth and shrinks during recessions.
  • Little research is required to understand the consumer goods sector, which could make it a more accessible industry for investors of all levels.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.