The extended bull market fueled by expansive growth in the technology sector may have been the catalyst for change as the reclassification of the sector takes place today, which could mean a bout of volatility is looming at the opening of Monday’s trading session. The S&P Dow Jones Indices will be reorganizing the Global Industry Classification Standard (GICS), which will bring a bevy of changes in not only tech, but also communications.
As technology, consumer and media industries have evolved since the dot-com bubble, so have the companies within those respective sectors. As such, this new reclassification is meant to reflect those changes.
“The changes are a step toward acknowledging the convergence of telecommunications, media, and select internet companies and the overlapping services rendered by these companies, within the GICS Structure,” S&P noted.
Recap of changes scheduled to occur :
- Last November, MSCI and S&P Dow Jones announced major changes to their sector classification system (GICS), which is used in many popular sector Exchange Traded Funds.
- The broadening of the current Telecommunications sector (to be renamed the Communications sector) significantly alters the Information Technology and Consumer Discretionary sectors.
- Most of the affected S&P benchmarked sector ETFs are scheduled to rebalance Friday September 21st at the close
- Communications Services (formally Telecommunications), will increase from roughly 2% to 10% of the S&P 500.
Technology will be reduced from approximately 26% to 20% of the S&P 500. - Consumer Discretionary will be reduced from approximately 13% to 10% of the S&P 500.
- In advance of these changes, Sector SPDRs introduced XLC, the Communication Services Sector SPDR, this summer. On Sept. 21, 2018, the Technology (XLK) and Consumer Discretionary (XLY) Sector SPDRs will rebalance to reflect the GICS changes.
Key changes and new weightings in the tech sector:
- FAANG representation will be spread across all three Select Sector ETFs: XLK, XLY, XLC
- Facebook and Google are leaving Tech and joining Communication Services
- Netflix is leaving Discretionary and joining Communication Services
- Apple is remaining in Tech (our TECL and TECS funds)
- Amazon is remaining in Consumer Discretionary and increasing to roughly 25% of the index
Investors should be primed for what could be a volatile Monday trading session as the reclassification is slated to occur at today’s session.
“Managers are going to be reluctant followers (of the sector changes) because they’re still going to want to choose stocks that fit their criteria,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. “For some funds, being significantly underweight or overweight a sector that’s as sizeable as communication services, or as sizeable as tech or consumer discretionary, is going to be problematic … so I do think there are going to be stock movements as a result of this.”
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