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For years, the purchase of exchange-traded funds, for example, on the technology sector, offered a simple investment strategy for individual investors who wanted to expose themselves to technological giants like Facebook and Alphabet.
On Monday, this simple approach will become more complicated. Investors who have money in ETFs based on the technology, telecommunications and consumer sectors of the S & P 500 will need to take note.
S & P Global Ratings and MSCI oversee a kind of corporate taxonomy, called Global Industry Classification Standard (GICS), which groups individual companies into sectors. On Monday, GICS will move three of the four FANG values - Alphabet, Facebook and Netflix – into a new sector. As technical as they are, they will have a significant impact on some passive ETFs and index funds that reflect these two sectors.
Normally, redistributing stocks in the sector would not be a big deal. But the three reclassified FANG stocks have a total market capitalization of $ 1.8 trillion. Fourteen other stocks are affected by sectoral changes, including Twitter, Disney, Comcast and News Corp.
Most of them will be grouped in what S & P had called the telecommunications sector and which will now be called "communication services". A technology company, eBay, will turn to the consumer discretionary sector.
In total, stocks that account for 10% of the S & P 500's capitalization will be affected by the changes, said Matthew Bartolini, State Street Global Advisors, in a recent podcast of Zacks Investment Research. The changes are supposed to reflect the way technology has affected different industries, he said.
"Americans spend more than 12 hours a day on some form of media communication," Bartolini said. "Dedicated to a telecommunications sector, which is really operators and operators of fixed telephony, no longer reflects the current communication environment. It was time to update the GICS classification scheme. "
According to Bloomberg data, after the changes, the S & P technology sector will grow from 26% to 21% of the S & P 500 index. The consumer sector, which housed until recently Netflix and Disney will increase from 13% to 10%. And the redesign of the communications services sector will account for 10% of the market capitalization of S & P 500, compared to 2% for the former telecommunications sector.
Only a few ETF providers respond to sectoral reclassifications. State Street (XLK) and Vanguard (VGT) Tech ETFs will reflect these changes, but Blackrock's Tech ETF (IYW) will not. ETF investors may want to check their portfolios and rebalance if necessary.
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