Following the close of U.S. markets on March 17, MSCI and S&P Dow Jones — the largest providers of indexes for use by exchange traded funds — will implement changes to the global industry classification standard (GICS).
For the advisors and investors out there that aren’t indexing nerds, GICS changes mean that an assortment of stocks will change sectors. Those adjustments are plentiful in terms of companies moving to financial services from technology, including the sector composition of fintech ETFs such as the ARK Fintech Innovation ETF (ARKF).
The changes will lessen the value feel of the financial services sector, giving the group a growthier style with the entries of Block (NYSE: SQ), Mastercard (NYSE: MA), PayPal (NASDAQ: PYPL), and Dow component Visa (NYSE: V), among others.
“Most impacted sectors will see a limited change to valuation multiples after the change, with the exception of Financials – where the forward P/E will rise 9% from 13.3x to 14.5x. The 8 S&P 500 stocks moving to the Financials sector from Tech (Payments stocks) currently trade at a forward P/E of 22x, 60% above the current Financial sector’s P/E, and they’ll comprise 19% of the sector,” noted Bank of America.
Regarding ARKF, the fund is actively managed, so it’s not constrained at the sector level. As of the end of last year, tech and financial services stocks combined for 77% of ARKF’s weight, according to issuer data. It’s possible that percentage will be comparable following the GICS changes, but with a haircut to tech’s weight within ARKF and an elevated percentage of financial services holdings.
Take the case of Block (NYSE: SQ). The company behind the Cash App digital wallet and the Square point of sale systems is ARKF’s second-largest holding at a weight of 10.54% as of March 2. That stock is currently a tech name, but it’s migrating to the financial services sector.
Toast (TOST), which provides point of sale systems to the restaurant industry, is another example of a company currently residing the tech sector that’s transitioning to the financial services space. That stock accounts for 3.35% of the ARKF portfolio.
Another byproduct of the big tech-to-financials move is that long-only active fund managers and hedge funds will go from being underweight to overweight on financial stocks.
“The biggest implications of the GICS change for fund manager positioning are in Financials and Tech – both LOs and HFs will go from being underweight Financials to overweight Financials due to funds’ high relative weights in Payments stocks that are changing sectors, and Tech will go from equal weight to underweight by LOs and will see its underweight deepen by HFs,” concluded Bank of America.
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