A GICS Review of Growth/Value ETFs

By Todd Rosenbluth, CFRA

In September, a new Communication Services GICS sector was formed after the shifting of some former technology, consumer discretionary and telecom services. While we’ve focused much attention on what this means for the S&P 500 index and sector ETFs, a significant amount of money is invested in growth or value ETFs that hold shares in the new GICS sector.

Based on latest available data on MarketScope Advisor, SPDR S&P 500 ETF (SPY) had an 8.3% weighting in the Communications Services sector, with sizable stakes in Alphabet (GOOGL), Disney (DIS), Facebook (FB), Netflix (NFLX) and Verizon Communications (VZ). These stocks are also part of the Communication Services Select Sector (XLC), which added $1.3 billion of new money in September, and Vanguard Communication Services Index ETF (VOX).

But, we think investors are less aware how the new sector configuration impacts the exposure they receive from style focused ETFs. Indeed, these ETFs are not constructed based on GICS classifications, and as such, what an investor sees is simply the result of a shift in the classification; however, because most ETFs track unique indices, the weightings in Communications Services is not consistent.

Let’s start with growth ETFs, since many of the new Communications Services have strong sales and earnings growth characteristics. Schwab US Large-Cap Growth ETF (SCHG) has 24% of assets in Information Technology, 16% in Consumer Discretionary and 12% in Communications Services; an additional 16% in health care is not impacted by the GICS realignment.

In contrast, SPDR Portfolio S&P 500 Growth (SPYG) has 33% in Technology, 14% in Consumer Discretionary (14%) and 10% in Communication Services stocks.  Both SCHG own Apple (AAPL), Amazon.com (AMZN) and Facebook (FB). Yet, the sector weighting difference stems in part from what is considered a growth stock to the index behind the ETF. Microsoft (MSFT) is a 6% part of SPYG, but the tech stock is not a holding for SCHG.

CFRA recently highlighted how some ETF investors are looking at iShares Edge MSCI USA Momentum (MTUM) as a replacement for more expensive actively managed large-cap growth mutual funds. Based on the new GICS structure, the ETF still has a 40% weighting in Information Technology and 16% in Consumer Discretionary, with just a 5% stake in Communication Services.  More value-oriented tech stocks, such as Cisco Systems (CSCO) and Intel (INTC) are part of MTUM.