Stocks in Your Sector ETF May be Shifting in 2018

By Todd Rosenbluth, CFRA

The stocks in your sector ETF or mutual fund may be shifting this year, depending on which sector you invest in and which asset manager you work with. As is often the case with funds, what’s inside – not historical record — will be the driver of future returns.

Last week, S&P Dow Jones Indices and MSCI, the two index providers behind the widely-adopted GICS framework, provided more clarity on the soon-to-be renamed Communications Services sector, changing from Telecommunications Services. Currently, AT&T (T), CenturyLink (CTL) and Verizon Communications (VZ) are the three lone companies in the Telecom Services sector of the S&P 500. However, following the revisions to the GICS structure being implemented at the end of September 2018, the trio will be joined by some prominent stocks currently in the consumer discretionary and information technology sector.

Vanguard offers three relevant MSCI based sector ETFs/mutual portfolios, one for each of the consumer discretionary, technology and telecom services sectors. Vanguard Telecom Services Index ETF (VOX) and Vanguard Telecom Services Index; Admiral (VTCAX) hold CTL, T and VZ as well as other telecom services stocks such as Sprint (S) and T-Mobile US (TMUS), but these share classes do not hold any technology or consumer discretionary stocks.

CFRA thinks Vanguard could choose to pay a special dividend to shareholders of Vanguard Consumer Discretionary Index Fund (VCR) and Vanguard Information Technology (VGT) in the form of VOX as a tax-efficient way to distribute the shares of DIS, GOOGL and other such communications services stocks that would need to be removed from the firm’s consumer discretionary and technology sector ETFs; unlike actively managed funds that have discretion on timing of purchases and sales, index based funds automatically add and remove stocks once they enter or leave the chosen index.