By Dave Haviland, Portfolio Manager and Managing Partner
I have spent the last several weeks travelling around the country visiting advisors and clients and speaking at events. At each meeting, I ask my audience if they are aware that the S&P 500® Index is about to undergo the largest reconfiguration in its history. So far, the resounding answer has been “no” so we thought it was important proactively help educate about this significant change with another memo From the Desk of the PM!
Recently the GICS (Global Industry Classification Standard) index manufacturers, together with S&P Dow Jones Indexes, announced that they were going to re-align the sectors of the S&P 500. The major changes include:
- Renaming the Telecommunications Sector to Communications.
- Pulling out ~18 media and entertainment companies from Consumer Discretionary and adding them to Communications, including Netflix, CBS and Walt Disney.
- Pulling out ~5 entertainment and software services companies from Technology and adding them to Communications including Google and Facebook.
- Pulling ~one Technology company, EBAY, and adding it to Consumer Discretionary.
Graphically, the changes will look like:
To summarize, these changes will result in a 6% reduction in the size of the Technology Sector and a 3% reduction in the size of the Consumer Discretionary Sector. The new Communications Sector will be about 10% of the market Cap of the S&P 500.
In terms of how the ETF sponsors are responding to this, we know that the SPDRs currently place Telecom companies in the Technology sector, so the reduction of this ETF’s size may be closer to 7% or 8%. The official rebalance of the Sectors is expected to take place on September 24th. However, we learned a lot from the previous GICS change when they separated REITs from Financials.
- Not every ETF family will adopt this change.
- The tax ramifications may vary from one ETF family to another depending on what they do and how they do it.
- Sector, industry or theme based mutual funds that invest in these companies may have extremely large Capital gain distributions in 2018 if they are forced to sell. The gains in many of these companies are huge, including Facebook, Google/Alphabet and Netflix.
- It is best to be early rather than late in entering the trade.
We plan to bring additional insights into the structural changes in further communications so please keep an eye out.
This article was contributed by David Haviland, managing partner and portfolio manager at Beaumont Capital Management, a participant in the ETF Strategist Channel.
For more insights like these, visit BCM’s blog at blog.investbcm.com
Sources and Disclosures:
S&P 500® Index is a registered trademark of Standard & Poor’s, Inc., a division of S&P Global Inc. The views and opinions expressed throughout this presentation are those of our Portfolio Manager as of 6/25/18. The opinions and outlooks may change over time with changing market conditions or other relevant variables. The information presented in this report is based on data obtained from third party sources. Although it is believed to be accurate, no representation or warranty is made as to its accuracy or completeness.