How a Tech Stock Shakeup on Monday Could Have a Big Impact on ETF Investors
For years, buying exchange-traded funds focused on, say, the technology sector has offered a simple buy-and-hold investment strategy for individual investors who wanted exposure to surging tech giants like Facebook and Alphabet.
Come Monday, that simple approach is about to get more complicated. And investors who have money in ETFs based on the S&P 500’s tech, telecom, and consumer sectors will need to take note.
S&P Global Ratings and MSCI oversee a kind of corporate taxonomy, known as the Global Industry Classification Standard (GICS), which groups individual companies into sectors. On Monday, GICS will move three of the four FANG stocks—Alphabet, Facebook, and Netflix—into a new sector. As technical as those moves sound, they will have a big impact on some of the ETFs and passive index funds that mirror those two sectors.
Normally, reshuffling sector stocks wouldn’t be a big deal. But the three FANG stocks being reclassified have market caps totaling $1.8 trillion. Another 14 stocks are being affected by the sector changes, including Twitter, Disney, Comcast, and News Corp..
Most will be lumped together into what S&P had termed the telecom sector, and which will now be named “communications services.” One tech company, eBay, will move to the consumer discretionary sector.
All told, stocks that make up 10% of the S&P 500’s capitalization will be affected by the changes, said Matthew Bartolini of State Street Global Advisors on a recent podcast by Zacks Investment Research. The changes are meant to reflect the way that technology has affected different industries, he said.
“Americans spend more than 12 hours a day on some form of media communications,” Bartolini said. “Dedicating a sector to telecom, which is really carriers and landline operators, no longer reflects the current communications environment. So it really was time for the GICS classification schema to be updated.”
After the changes, the S&P tech sector will go from 26% to 21% of the S&P 500 Index, according to Bloomberg data. The Consumer sector, until recently the home of Netflix and Disney, will go from 13% to 10%. And the revamped communications services sector will make up 10% of the S&P 500 market cap, up from the 2% the old telecom sector represented.
Only some ETF providers are responding to the sector reclassifications. Tech ETFs from State Street (XLK) and Vanguard (VGT) will reflect the changes, but Blackrock’s tech ETF (IYW) won’t. ETF investors may want to check their portfolios, and rebalance if necessary.