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.
Year to date through September, SPYG’s 17.0% total return was modest higher than SCHG and MTUM.
Sticking to the value side of the investment spectrum, iShares S&P 500 Value (IVE) held more in Communications Services (7%) of assets than in Consumer Discretionary (6%). Former telecom services stocks AT&T (T) and VZ are joined by former consumer stocks Comcast (CMCSA) and DIS in the new sector.
However, peer Vanguard Value Index ETF (VTV) has a 5% weighting in Communications Services, but a 15% weighting in Information Technology (higher than the 6% in IVE). Here too a hefty stake in MSFT contributes to the large weighting in the tech sector.
Year to date, VTV’s 6.0% total return was nearly double the 3.3% gain for IVE, highlighting the difference in the exposure similarly sounding ETFs provide.
While the sector weightings of these style-oriented ETFs will shift as the growth/momentum or value criteria is revisited per index rules, there are no sector constraints in building these portfolios. As such, we think investors need to look inside and understand how much exposure they have to the three impacted sectors.
CFRA will be hosting a webinar “Seasons Change, Sectors Change” on October 9 to address seasonality and ETFs worthy of focus in the fourth quarter. To register visit https://go.cfraresearch.com/WebinarSeasonsChange.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.