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GICS Sector Changes: Impact on Sector ETFs

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After the close on 17 March, S&P Dow Jones and MSCI will reclassify the Global Industry Classification Standard (GICS) structure. This will influence 14 S&P 500 companies. The current GICS structure includes 11 sectors, which will remain unchanged.

The reclassification of firms will occur across five GICS sectors. These are consumer discretionary, consumer staples, financials, industrials, and information technology. The financials and information technology sectors will see the largest impact. UBS estimates financials weight in the S&P 500 will increase by 2.7% and information technology will decline by 3.2%.

Moreover, food, household, and personal care products firms like Target (TGT - Free Report) , Dollar General (DG - Free Report) and Dollar Tree (DLTR - Free Report) will leave the Consumer Discretionary Select Sector SPDR ETF XLY and join the Consumer Staples Select Sector SPDR ETF (XLP - Free Report) The new discount stores companies will constitute about 6.5% of the new staples sector, per the UBS article.

Below we describe the likely impact of this reclassification on concerned sector ETFs.

Sector ETFs in Focus

Finance & Information Technology

Financial Select Sector SPDR Fund (XLF - Free Report) takes the spotlight.Eight S&P 500 stocks from the data processing & outsourced services subindustry will move to the newly created transaction and payment processing services subindustry in the financials sector.

The securities include Visa Inc., Mastercard Inc., PayPal Holdings Inc., Fiserv Inc., Fidelity National Information, Global Payments Inc., FleetCor Technologies Inc. and Jack Henry & Associates Inc. Each of the stocks will have larger weightings within their new sector. 

Visa (V - Free Report) , Mastercard (MA - Free Report) , and PayPal PYPL will form roughly 17% of the financials sector, larger than Berkshire Hathaway's weight (currently the largest component), per the article published on Digital payments have been in the front and center of consumer behavior lately.

Apart from showing an increased interest in online shopping, customers are resorting to digital payments to clear their bills. Even, merchants and utility providers are increasingly advocating the same. In the ongoing earnings reporting season, PayPal beat earnings estimate while Mastercard and Visa beat on both lines.

However, the reclassification makes XLF a bit growth-centric. Visa, Mastercard, and PayPal, on average, trade at about a 90% premium to the financials sector on a consensus forward P/E basis. This is a negative for the sector if rates continue to rise.

With pure high-growth technology stocks gaining precedence in the fund, the fund will likely lose its relative value quotient. Rising rate environment will likely prove to be riskier for Technology Select Sector SPDR ETF (XLK - Free Report) ).


Consumer Staples Select Sector SPDR ETF (XLP - Free Report) is another sector ETF that deserves definite mention. UBS estimates that the weight of the consumer discretionary sector in the S&P 500 will likely fall by 0.5% and consumer staples will likely gain by 0.5%. Dollar Tree and Target beat on both lines in latest earnings season while Dollar General offered mixed results. UBS indicated that valuation of those discount retailers was at par with consumer staples. Hence, the impact would be minimal. Consumer Discretionary Select Sector SPDR ETF XLY rather now became slightly richly-valued.


Automatic Data Processing (ADP - Free Report) , Broadridge Financial Solutions (BR - Free Report) and Paychex Inc. (PAYX - Free Report) come from industry and sectors that have upbeat Zacks ranks. These outsourcing stocks will join Industrial Select Sector SPDR ETF (XLI - Free Report) with larger weights, post reclassification. The valuation of the sector ETF will go up slightly as ADP and PAYX trade at around 35% premium to XLI.


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