Industry Classification and Company Grouping Methods

Updated for the 2026-2027 CFA® Level I curriculum.

Analysts group companies to build peer sets for comparison, valuation, and industry analysis. The 2026 Level I curriculum covers three distinct approaches: classification by products and services, classification by business-cycle sensitivity, and classification by statistical similarities.

Level I questions test whether you can identify which method applies to a company description and explain why the choice of method changes the resulting peer group. This note compares the methods directly so you can apply the right one to exam facts.

Key Takeaways About Industry Classification and Company Grouping Methods

• Companies can be grouped three ways: by products and services, by business-cycle sensitivity, or by statistical similarities.

• Industry classification systems split into commercial systems (GICS, ICB, RBICS, TRBC) built for investment analysis and governmental systems (ISIC, NAICS, SIC) built for economic statistics.

• Business-cycle sensitivity groups companies as cyclical or non-cyclical. Non-cyclical splits further into defensive and growth companies.

• Statistical grouping uses cluster analysis based on correlations in returns or fundamentals rather than a predetermined label.

• Commercial classification systems update more often than governmental systems and are the basis for most index construction.

• Multi-segment companies are hard to classify accurately under any single-label system.

• The grouping method chosen changes which companies land in a peer group, which changes the meaning of any ratio comparison built from that group.

What You Need to Know for CFA Level I

• Identify whether a classification system is commercial (GICS, ICB, RBICS, TRBC) or governmental (ISIC, NAICS, SIC).

• Classify a company as cyclical or non-cyclical based on how a scenario describes its revenue behavior through the business cycle.

• Distinguish defensive non-cyclical companies from growth non-cyclical companies.

• Explain how statistical or cluster-based grouping differs from grouping by products or services.

• State one advantage and one limitation for each grouping method.

• Explain how the grouping method used can change peer group membership and distort ratio comparisons.

Industry Classification Methods

Industry classification systems group companies by the products and services they sell. Level I splits these systems into two categories.

Commercial industry classification systems are built and maintained by financial data providers for investment analysis. The main examples are:

• GICS (Global Industry Classification Standard), developed by MSCI and S&P

• ICB (Industry Classification Benchmark), developed by FTSE Russell

• RBICS (Revere Business Industry Classification System), developed by FactSet

• TRBC (Refinitiv Business Classification)

These systems use a hierarchical structure. A company sits in a sector, then an industry group, then an industry, then a sub-industry. Index providers use commercial systems to build sector indexes, which is why they matter for equity analysis.

Governmental industry classification systems are built by government agencies to collect and report economic statistics. The main examples are:

• ISIC (International Standard Industrial Classification), maintained by the United Nations

• NAICS (North American Industry Classification System), used in the United States, Canada, and Mexico

• SIC (Standard Industrial Classification), an older US system still referenced in some filings

Governmental systems are useful for historical and macroeconomic data. They are not designed for peer comparison or investment analysis, and they update far less often than commercial systems.

Methods for Grouping Companies

Beyond product-based classification, analysts group companies two other ways.

By business-cycle sensitivity. Companies are labeled cyclical or non-cyclical based on how closely revenue and earnings track the economic cycle.

• Cyclical companies have earnings that rise and fall with the business cycle. Examples include automakers and capital goods producers.

• Non-cyclical companies have earnings that are largely independent of the business cycle. This category splits into two groups:

• Defensive companies sell goods or services with steady demand regardless of economic conditions, such as utilities or basic consumer staples.

• Growth companies have demand strong enough that only a severe downturn reduces it.

By statistical similarities. Cluster analysis groups companies based on correlations among stock returns or financial fundamentals, without relying on a predetermined product category. This method can group companies together that a product-based system would separate, because it responds to actual empirical relationships instead of a label.

Advantages and Limitations of Alternative Grouping Approaches

Each method solves a different analytical problem. Product-based systems answer "what does this company make?" Business-cycle grouping answers "how does this company respond to the economy?" Statistical grouping answers "which companies actually move together?" A single company can belong to different peer sets depending on which question the analyst is asking.

How Classification Choice Affects Peer Analysis

The classification method an analyst picks determines which companies appear in a peer group, and that determines whether ratio and valuation comparisons are meaningful.

Product-Based Classification

Product-based systems assign a company to one primary category, usually based on its largest revenue segment. A company with a secondary business line that behaves differently from its main segment can end up compared to peers that do not share its actual risk or margin profile.

Business-Cycle Classification

Business-cycle grouping solves a different comparability problem. Two companies can share the same product classification but respond very differently to a recession. If an analyst only uses a product-based peer group, this difference gets hidden. A peer group built on business-cycle sensitivity would separate them.

Statistical Classification

Statistical grouping catches relationships that neither system captures directly, since it is based on observed correlation rather than a category label. Its drawback is that the relationship can be a product of the specific time period used and may not hold going forward.

Worked Example

An analyst is evaluating Company Z, a specialty retailer of home appliances, and wants to build a peer group. Using a commercial classification system, all four companies below sit in the same industry group, Specialty Retail:

All four companies carry the same product-based classification, so a peer group built strictly from that system would include all four.

Step 1

Compare recession-year revenue changes. Companies Z, P, and Q all show sharp declines, in the -18% to -20% range. Company R shows almost no decline.

Step 2

Apply business-cycle sensitivity grouping. Z, P, and Q behave as cyclical companies. R behaves as a non-cyclical company, most likely defensive, since its revenue held up despite the downturn.

Step 3

Interpret the result. Even though all four companies share the same product-based classification, R does not belong in a peer group meant to test how appliance demand responds to the economy. A peer group of Z, P, and Q built on business-cycle sensitivity gives a more meaningful comparison than one built solely on product classification.

Common Exam Traps

Treating industry classification and business-cycle grouping as the same thing

Product-based systems like GICS group by what a company sells. Business-cycle grouping sorts by how earnings respond to the economy. A question can test either one, and they can produce different peer sets for the same company.

Memorizing the acronym list without applying it

Knowing that GICS, ICB, RBICS, and TRBC are commercial systems and that ISIC, NAICS, and SIC are governmental systems is not enough. The exam usually gives a scenario and asks which category or method fits the facts.

Forcing a multi-segment company into one clean label

A conglomerate is normally classified by its largest revenue segment under a product-based system. This does not mean the rest of its business is irrelevant to analysis, and a question may test whether you recognize this limitation.

Collapsing defensive and growth into one non-cyclical bucket

Both are non-cyclical, but they are not identical. Defensive companies have steady demand. Growth companies have demand strong enough to withstand all but severe downturns. Treating them as interchangeable is a common scoring error.

Practice Question

An analyst builds a peer group for an automobile parts manufacturer using a commercial industry classification system. All the peer companies share the same sub-industry code, but sales data show that one peer's revenue is largely unaffected by the business cycle, while the subject company's revenue falls sharply in recessions. Which alternative grouping method would best address this comparability problem?

1. A governmental classification system such as NAICS

2. Grouping companies by business-cycle sensitivity

3. A different commercial classification system such as ICB

FAQs About Industry Classification and Company Grouping Methods