Following the close of U.S. markets Thursday, March 17, index giants S&P and MSCI commence the latest alterations to the global industry classification standard (GICS), meaning a slew of companies are moving from one sector to another and, in some cases, getting new industry classifications in the process.
As has been previously noted, some of the sectors seeing the biggest shifts include technology, financial services, and consumer discretionary. That trio combines for nearly half of the cap-weighted S&P 500 today. Amid expectations that the upcoming sector shuffling could lead to more concentration in cap-weighted exchange traded funds, equal-weight strategies such as the Invesco S&P 500® Equal Weight ETF (RSP) and its environmental, social, and governance (ESG) counterpart, the Invesco ESG S&P 500 Equal Weight ETF (RSPE).
In a recent report previewing the GICS changes, Bank of America reiterated a preference for equal-weight strategies, in part citing concentration risk.
“As the GICS Technology and Discretionary sectors become more narrowly defined, market cap weighted Tech ETFs may become more concentration,” according to the bank. “For example, we calculate that the average weight of the top 5 stocks in our coverage information technology ETFs is 56%. We estimate that this will rise to 58% as stocks are removed from the Technology sector and into other sectors like Financials and Industrials. Similarly, Discretionary ETFs could increase the weight of their top five holdings from 49% to 51%.”
As noted above, the sector shuffles will be pronounced among tech and financials because a slew of companies, many with fintech ties, are departing the former group for the latter. That will bring more of a growth feel to the value-laden financial sector, but investors should be aware of other issues.
“Relative to current market cap, S&P 500 Financials ETFs on average could see a 20% change in composition from added funds. S&P 500 Tech ETFs could see an 11% change in composition from funds being removed. Other sectors like Industrials, Staples, Discretionary should see more muted changes,” noted Bank of America.
For investors that want to remain engaged with tech while mitigating concentration risk, the Invesco S&P 500 Equal Weight Technology ETF (RYT) is an interesting idea. RYT currently holds 78 stocks, the largest of which commands a weight of 1.77%, as of March 13. While those numbers are likely to change following the GICS shifts, RYT will maintain its perch as one of the least concentrated tech ETFs.
The Invesco S&P 500 Equal Weight Financials ETF (RYF) is the equal-weight play on financials. That ETF currently holds 68 stocks – a number that is likely to be higher come Friday morning. Its largest holding has a 2.25% allocation, which could decline or increase following the sector shifts.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.