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Stocks such as Facebook(FB), Netflix(NFLX), and Verizon Communications(VZ) will live under the same roof from next week. the Global Industry Standard Classification, or GICS, creates a new sector called Communications Services, which will absorb the names of the former technology, consumer discretionary and telecommunications sectors.
GICS is a standardized classification system for stocks developed by S & P Global and MSCI in 1999. S & P Global will incorporate the latest closing changes on Friday, September 21, while MSCI will do the same on November 30.
Alphabet and Facebook will no longer be part of the technology sector once S & P and MSCI have changed the way they classify companies.
Within the S & P 500, six information technology stocks, 13 consumer discretionary stocks and three telecommunications services will be transferred to the new communications services sector. The reclassified stocks include some of the biggest names in the market: Alphabet(GOOGL), Facebook, Twitter(TWTR), Netflix, Walt Disney(DIS), Comcast(CMCSA) AT & T(T) and Verizon.
Read more: A booming market pushes the alphabet and Facebook out of the tech sector
About one-tenth of the market capitalization of the S & P 500 will be affected by the change, Wells Fargo analyst Christopher Harvey estimates in a report released Friday. The new communications services sector will account for about 10% of the market capitalization of the S & P 500, while information technology will fall to about 20% from the current 26% and the consumer discretionary sector will fall from 13% to 10%. around 10%.
Sector changes probably have a limited impact for most "long-standing" active asset managers, says Harvey, because many of them already have an internal system of pooling stocks that could be more relevant and timely.
The most affected reclassifications will be sector ETFs compared to GICS indices, including State Street and Vanguard sector funds.
While Vanguard had already begun its transition process a few months ago, sectoral SPDR ETFs will introduce their changes at closing on September 21, 2018. Select Sector Technology SPDR ETF(XLK), with approximately $ 27 billion of assets, and Selective consumer sector(XLY), with $ 18 billion, will sell its holdings of shares in the communications services sector. In addition, there will be entries for the rest of the technology companies and discretionary companies to fill the gap. Ryan Talbot of Instinet wrote in a report that he expected rebalancing flows of about $ 20 billion for both funds.
The reclassification would result in a demand for liquidity for the affected XLK and XLY stocks, but probably minimal. As calculated by Harvey, the demand for liquidity generated by GICS flows will be lower than the average daily volume of most of the securities concerned.
Harvey also pointed out that Friday, September 21 is also the day S & P performs its quarterly rebalancing of the index, which will also influence fund flows. For example, the XLK would add more Apple(AAPL) to fill the void left by Alphabet and Facebook, but also to reduce the weighting of the stock due to the overall rebalancing of the S & P 500. Talbot of Instinet estimates that about half of the GICS flows will be offset by the Quarterly Rebalancing Flows from S & P
As ETFs prepare for rebalancing, investors are also adjusting their sectoral exposure, some before rebalancing, while others plan to do so later. As the repositioning is spread over several months and not a one-off event, the impact should not be too dramatic, Talbot writes.
State Street has also launched the Select Sector SPDR ETF Communication Services(XLC) in June. The fund has not accumulated a lot of assets yet, but Talbot noted that creative activities have begun to improve.
Write to Evie Liu at [email protected]
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