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How Will the S&P 500 Sector Reshuffle Impact Markets?
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The much awaited sectoral reorganization of the Global Industry Classification Standard (“GICS”) of S&P Dow Jones Indices will become effective from Sep 24. In fact, this will mark Wall Street’s largest broad-industry sectoral overhaul since 1999 and will result in readjustment of 23 stocks with market cap around $2.7 trillion. The S&P 500’s market cap will be impacted by about 10%.
Major sectors which will be affected by this overhaul are information technology, consumer discretionary and old-economy telecommunications which is now being revived as communication services sector. The stock reshuffle is likely to have a ripple effect through the $4.4 trillion global exchange traded funds market along with other institutionally managed funds like mutual funds, hedge funds to name a few.
Who is Moving Where?
The newly formed communications sector will consist of traditional telecom operators, internet-based companies and media companies. Seven internet-based behemoths and 16 consumer discretionary stocks will enter this sector.
Per the index committee of S&P Dow Jones Indices, rapid technological advancement is systematically redefining the parameters of these industries and as such these industries are converging. The sectoral overhaul will reflect consumer preference to utilize internet services, online digital platform and content under a single entity. According to the index committee, reshuffling of the S&P 500 sectors will make them more pure-play in nature.
How Will the Reclassification Affect S&P 500 Sectors?
The recent sectoral overhaul will increase communications services’ weightage in the overall S&P 500 index from a mere 1.9% to 10.2%. Meanwhile, the influence of tech sector and consumer discretionary sectors will come down from 25.6% to 20.1 and 12.7% to 10%, respectively.
The old telecom sector was characterized as defensive and highly suitable for value investors due to its high dividend yield. However, the new communications services sector will be cyclical with high growth orientation and low dividend yield. Moreover, within this sector, stocks like Alphabet, Netflix and Facebook will carry more weight sidetracking Verizon and AT&T.
For the tech sector, Apple Inc.’s (AAPL - Free Report) weightage will increase from 15.6% to 20%. Other beneficiary companies in this sector will be Microsoft, Intel, Cisco and Visa. The consumer discretionary sector will rotate around Amazon.com Inc. (AMZN - Free Report) as its weight will go up from 27% to 34%. Other important stocks in this sector will be Home Depot and McDonald's Corp.
Effect on Asset Managers and Individual Investors
There might not be any significant impact for fund managers tracking broad-market S&P 500 index since there is no entry or elimination of any stock. However, there might be significant changes in portfolios of exchange traded funds (ETF) which passively track sector indexes and several other mutual funds focused on indexes of telecom, tech and consumer discretionary sectors. This could trigger a domino effect in stock markets.
The FAANG stocks, prominently known as tech behemoths have provided a massive 34% average return in the last five years compared with 14.5% of the benchmark S&P 500. These stocks will now be divided into three sectors.
Moreover, reclassification will change these three sector’s returns, P/E multiples, margins and fundamental growth potential. Accordingly, asset managers may need to reshuffle stocks worth billions of dollars to readjust their portfolios.
Additionally, it was noticed that several asset managers handling quantitative hedge funds use sector ETFs to hedge their portfolio. Changes in sector ETFs will affect their positions as some sectors may become overweight while some may be downgraded to underweight.
Individual investors also take into consideration market trends while taking their investment decisions. Generally, people buy stocks of growth industries in upswing and defensive ones in the bear market. The change in the S&P 500 sectoral composition will also compel them to reconsider their investment decisions.
The effect of S&P 500’s sectoral overhaul is evident from the fact that the newly introduced the Communication Services Select Sector SPDR (XLC) Fund, launched by the State Street witnessed trading worth of more than $215 million on Sep 20, an all-time record for the fund since it started in June.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
How Will the S&P 500 Sector Reshuffle Impact Markets?
The much awaited sectoral reorganization of the Global Industry Classification Standard (“GICS”) of S&P Dow Jones Indices will become effective from Sep 24. In fact, this will mark Wall Street’s largest broad-industry sectoral overhaul since 1999 and will result in readjustment of 23 stocks with market cap around $2.7 trillion. The S&P 500’s market cap will be impacted by about 10%.
Major sectors which will be affected by this overhaul are information technology, consumer discretionary and old-economy telecommunications which is now being revived as communication services sector. The stock reshuffle is likely to have a ripple effect through the $4.4 trillion global exchange traded funds market along with other institutionally managed funds like mutual funds, hedge funds to name a few.
Who is Moving Where?
The newly formed communications sector will consist of traditional telecom operators, internet-based companies and media companies. Seven internet-based behemoths and 16 consumer discretionary stocks will enter this sector.
Notable among them are Facebook Inc. , Alphabet Inc. (GOOGL - Free Report) , Netflix Inc. (NFLX - Free Report) , Comcast Inc. (CMCSA - Free Report) and The Walt Disney Co. (DIS - Free Report) . They will join existing players like Verizon, AT&T and CenturyLink. However, eBay Inc. (EBAY - Free Report) will move to consumer discretionary from the tech sector. eBay carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Per the index committee of S&P Dow Jones Indices, rapid technological advancement is systematically redefining the parameters of these industries and as such these industries are converging. The sectoral overhaul will reflect consumer preference to utilize internet services, online digital platform and content under a single entity. According to the index committee, reshuffling of the S&P 500 sectors will make them more pure-play in nature.
How Will the Reclassification Affect S&P 500 Sectors?
The recent sectoral overhaul will increase communications services’ weightage in the overall S&P 500 index from a mere 1.9% to 10.2%. Meanwhile, the influence of tech sector and consumer discretionary sectors will come down from 25.6% to 20.1 and 12.7% to 10%, respectively.
The old telecom sector was characterized as defensive and highly suitable for value investors due to its high dividend yield. However, the new communications services sector will be cyclical with high growth orientation and low dividend yield. Moreover, within this sector, stocks like Alphabet, Netflix and Facebook will carry more weight sidetracking Verizon and AT&T.
For the tech sector, Apple Inc.’s (AAPL - Free Report) weightage will increase from 15.6% to 20%. Other beneficiary companies in this sector will be Microsoft, Intel, Cisco and Visa. The consumer discretionary sector will rotate around Amazon.com Inc. (AMZN - Free Report) as its weight will go up from 27% to 34%. Other important stocks in this sector will be Home Depot and McDonald's Corp.
Effect on Asset Managers and Individual Investors
There might not be any significant impact for fund managers tracking broad-market S&P 500 index since there is no entry or elimination of any stock. However, there might be significant changes in portfolios of exchange traded funds (ETF) which passively track sector indexes and several other mutual funds focused on indexes of telecom, tech and consumer discretionary sectors. This could trigger a domino effect in stock markets.
The FAANG stocks, prominently known as tech behemoths have provided a massive 34% average return in the last five years compared with 14.5% of the benchmark S&P 500. These stocks will now be divided into three sectors.
Moreover, reclassification will change these three sector’s returns, P/E multiples, margins and fundamental growth potential. Accordingly, asset managers may need to reshuffle stocks worth billions of dollars to readjust their portfolios.
Additionally, it was noticed that several asset managers handling quantitative hedge funds use sector ETFs to hedge their portfolio. Changes in sector ETFs will affect their positions as some sectors may become overweight while some may be downgraded to underweight.
Individual investors also take into consideration market trends while taking their investment decisions. Generally, people buy stocks of growth industries in upswing and defensive ones in the bear market. The change in the S&P 500 sectoral composition will also compel them to reconsider their investment decisions.
The effect of S&P 500’s sectoral overhaul is evident from the fact that the newly introduced the Communication Services Select Sector SPDR (XLC) Fund, launched by the State Street witnessed trading worth of more than $215 million on Sep 20, an all-time record for the fund since it started in June.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>