by Ryan Detrick, Investment Strategist, LPL Research
Mark your calendars, because S&P GICS sectors are scheduled to undergo one of their most significant makeovers in history. Effective September 28, S&P Dow Jones Indices will make significant changes to its Global Industrial Classification Standard—referred to as GICS. Index provider MSCI will follow with its own updated indices in early December.
Reclassifying companies into different sectors may not sound like a big deal for the S&P 500 Index, but as shown in LPL’s Chart of the Day, this one will be quite meaningful.
The telecommunication services sector will be expanded and renamed “communication services.” The stocks that will be added to the expanded sector are mostly media and internet companies within the consumer discretionary and technology sectors, with a focus on digital advertising and social media.
“The revamped and rebranded telecom sector will look much different than its predecessor, with superior growth prospects, higher valuations, and likely higher volatility,” according to John Lynch, LPL’s Chief Investment Strategist. “At the same time, the consumer discretionary sector will have less emphasis on traditional media, while the technology sector will lose some of its internet high-fliers.”
The S&P 500 weighting for the telecom services sector—rebranded as communication services—will increase from 2.0% to 10.1%. After the changes, three of the original four “FANG” stocks (Facebook, Netflix, and Google/Alphabet) will be part of the new communication services sector. In total, about 8% of the S&P 500 is being reclassified in the biggest change to the sector landscape in the history of the GICS.
The information technology sector will be trimmed to about 21% weight (from 26% currently) in the S&P 500. Consumer discretionary will be reduced to 10.1% weight (from 12.8%).
We believe these changes are important for investors to consider, especially those who use telecom, consumer discretionary, or technology sector strategies including exchange-traded funds.
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