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Big Tech Sector Shake-Up Put These Stocks and ETFs in Focus
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The biggest change in Wall Street's broad sectors since 1999 is scheduled for today, with a reshuffle of the technology and media sectors. Last year, S&P Dow Jones and MSCI had announced major changes in the Global Industry Classification Standard (GICS) that broadened the old telecommunication sector and renamed it to communication services sector, effective Sep 24, 2018.
The shift will reclassify some of the hot and soaring high-growth tech and media stocks, with telecom stocks into a newly-minted communication services sector. This is the first restructured sector on the S&P 500 since real estate was removed from the financial sector to become the 11th sector two years ago (read: How GICS Changes Will Impact Hottest Stocks and ETFs).
Inside the Shake-Up
The telecommunications sector, known for defensive bets due to the inclusion of highest-dividend yield stocks, has now become riskier and cyclical with a new look. This is especially true as the newly minted sector has grown from three to more than 20 companies, adding some key names from the technology and the consumer discretionary sectors.
Three of the FANG stocks — Facebook (FB), Netflix (NFLX) and Google parent Alphabet (GOOGL) — have moved to the new communication service sector. These stocks combined have $1.8 trillion in market capitalization. Other technology names — Twitter (TWTR), PayPal Holdings (PYPL), Activision Blizzard (ATVI) and Electronic Arts (EA) — also moved to the new sector from technology.
Media stocks such as Walt Disney (DIS), Comcast (CMCSA), CBS (CBS) and News Corp. (NWSA) have also left the consumer discretionary space to join the new one. Meanwhile, Amazon (AMZN) remains in the consumer discretionary space, with increased weightings to 25% (read: FAANG ETFs Face Off Amid New Tariffs: Apple Vs. Amazon).
Components of communication services sector are as follows:
*Source: S&P/Dow Jones Indices
With the overhaul of the components, tech stocks now comprise half of the communication services sector, while consumer stocks led by Netflix make up another 28%. Telecom stocks will represent less than 20% share in the sector.
The new communications sector will now hold 61% or the majority of growth stocks versus 100% value stocks in the old grouping and much higher than 47% growth stocks for the information technology post sector shift, according to State Street Advisors. Further, the new sector has a forward price-to-earnings ratio of 19.3, nearly double the former telecom sector. CFRA estimates that the forward-earnings P/E multiple for the new sector could be as high as 28x versus under 11x for the old telecom.
With the reshuffling, Apple (AAPL) and Microsoft (MSFT) are now the biggest companies in the popular tech sector. In fact, Apple now represents 20% of the index’s market capitalization, up from 16%. Other tech companies like Visa Inc (V), Intel (INTC) and Cisco Systems (CSCO) round off the largest five components in the index.
The changes have reduced the information technology sector weights on the S&P 500 to 20% from 26% and consumer discretionary sector weights to 10% from 13%, while increasing the new communication service (formerly telecommunications) sector weights to 10% from 2%. Overall, the GICS changes have reshuffled 10% of the S&P 500’s capitalization, affecting stocks worth about $2.8 trillion in market capitalization (read: Big Tech Reshuffle & A New FANG ETF).
Per Sam Stovall, chief investment strategist for CFRA, the technology, consumer discretionary and communications sectors will be more "pure plays" after the move, meaning that they will each be a bit more straightforward and focused on specific industries.
Market Impact
A big sector change that coincided with the quarterly expiration of futures and options led to a burst of volumes in the last 15 minutes of the trading session on Sep 21. About 10.87 billion shares changed hands on the U.S. exchanges on Friday, the highest volume since Feb 9 and one of the highest-volume sessions of the year, according to Thomson Reuters.
Such heavy volume is expected to continue in the days ahead as well, given that the shake-up will encourage new buying in the stocks. Investors will also look for momentum in some of the media and other stocks in the new communication services sector. According to the estimates from State Street, the regrouping of companies in new sector is expected to generate more than $30 billion in market activity as active investors and passive ETFs readjust their positions to reflect the new weightings.
ETFs Under the Spotlight
Communication Services Select Sector SPDR (XLC - Free Report) is a newly launched ETF targeting the new communication sector. It was launched in June 18 and has amassed $968.2 million in its asset base since then. Facebook and Alphabet are the top two firms, representing about 42% of the portfolio. Expense ratio comes in at 0.13% (read: ETFs in Focus on GICS Changes: Top Tech & FANG).
Vanguard Communication Services ETF (VOX - Free Report) also targets the communication service sector with Alphabet and Facebook as the top two holdings at 22.3% and 14.7%, respectively. It has AUM of $1 billion and charges 10 bps in annual fees.
The ultra-popular Technology Select Sector SPDR Fund (XLK - Free Report) and Vanguard Information Technology (VGT - Free Report) has now become pure-play technology ETFs with top constituents such as Apple, Microsoft, Visa and Cisco. XLK has AUM of $26.6 billion and charges 13 bps in fees per year from investors, while VGT has AUM of $22.5 billion and comes with an expense ratio of 0.10%.
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) will also rebalance to reflect the GICS changes. Cable and entertainment stocks like Comcast and Walt Disney as well as streaming stocks like Netflix (NFLX) are being moved to XLC. The ETF has been able to manage $18.3 billion and charges 13 bps in annual fees (read: ETFs to Tap Amazon's Growth and Expansion Story).
Vanguard Consumer Discretionary ETF (VCR - Free Report) has already been phasing out changes using the transition benchmarks. The weightage to Comcast, Walt Disney and Netflix (NFLX) has already been lowered. VCR has amassed $3.2 billion in AUM and charge s10 bps in annual fees.
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Big Tech Sector Shake-Up Put These Stocks and ETFs in Focus
The biggest change in Wall Street's broad sectors since 1999 is scheduled for today, with a reshuffle of the technology and media sectors. Last year, S&P Dow Jones and MSCI had announced major changes in the Global Industry Classification Standard (GICS) that broadened the old telecommunication sector and renamed it to communication services sector, effective Sep 24, 2018.
The shift will reclassify some of the hot and soaring high-growth tech and media stocks, with telecom stocks into a newly-minted communication services sector. This is the first restructured sector on the S&P 500 since real estate was removed from the financial sector to become the 11th sector two years ago (read: How GICS Changes Will Impact Hottest Stocks and ETFs).
Inside the Shake-Up
The telecommunications sector, known for defensive bets due to the inclusion of highest-dividend yield stocks, has now become riskier and cyclical with a new look. This is especially true as the newly minted sector has grown from three to more than 20 companies, adding some key names from the technology and the consumer discretionary sectors.
Three of the FANG stocks — Facebook (FB), Netflix (NFLX) and Google parent Alphabet (GOOGL) — have moved to the new communication service sector. These stocks combined have $1.8 trillion in market capitalization. Other technology names — Twitter (TWTR), PayPal Holdings (PYPL), Activision Blizzard (ATVI) and Electronic Arts (EA) — also moved to the new sector from technology.
Media stocks such as Walt Disney (DIS), Comcast (CMCSA), CBS (CBS) and News Corp. (NWSA) have also left the consumer discretionary space to join the new one. Meanwhile, Amazon (AMZN) remains in the consumer discretionary space, with increased weightings to 25% (read: FAANG ETFs Face Off Amid New Tariffs: Apple Vs. Amazon).
Components of communication services sector are as follows:
*Source: S&P/Dow Jones Indices
With the overhaul of the components, tech stocks now comprise half of the communication services sector, while consumer stocks led by Netflix make up another 28%. Telecom stocks will represent less than 20% share in the sector.
The new communications sector will now hold 61% or the majority of growth stocks versus 100% value stocks in the old grouping and much higher than 47% growth stocks for the information technology post sector shift, according to State Street Advisors. Further, the new sector has a forward price-to-earnings ratio of 19.3, nearly double the former telecom sector. CFRA estimates that the forward-earnings P/E multiple for the new sector could be as high as 28x versus under 11x for the old telecom.
With the reshuffling, Apple (AAPL) and Microsoft (MSFT) are now the biggest companies in the popular tech sector. In fact, Apple now represents 20% of the index’s market capitalization, up from 16%. Other tech companies like Visa Inc (V), Intel (INTC) and Cisco Systems (CSCO) round off the largest five components in the index.
The changes have reduced the information technology sector weights on the S&P 500 to 20% from 26% and consumer discretionary sector weights to 10% from 13%, while increasing the new communication service (formerly telecommunications) sector weights to 10% from 2%. Overall, the GICS changes have reshuffled 10% of the S&P 500’s capitalization, affecting stocks worth about $2.8 trillion in market capitalization (read: Big Tech Reshuffle & A New FANG ETF).
Per Sam Stovall, chief investment strategist for CFRA, the technology, consumer discretionary and communications sectors will be more "pure plays" after the move, meaning that they will each be a bit more straightforward and focused on specific industries.
Market Impact
A big sector change that coincided with the quarterly expiration of futures and options led to a burst of volumes in the last 15 minutes of the trading session on Sep 21. About 10.87 billion shares changed hands on the U.S. exchanges on Friday, the highest volume since Feb 9 and one of the highest-volume sessions of the year, according to Thomson Reuters.
Such heavy volume is expected to continue in the days ahead as well, given that the shake-up will encourage new buying in the stocks. Investors will also look for momentum in some of the media and other stocks in the new communication services sector. According to the estimates from State Street, the regrouping of companies in new sector is expected to generate more than $30 billion in market activity as active investors and passive ETFs readjust their positions to reflect the new weightings.
ETFs Under the Spotlight
Communication Services Select Sector SPDR (XLC - Free Report) is a newly launched ETF targeting the new communication sector. It was launched in June 18 and has amassed $968.2 million in its asset base since then. Facebook and Alphabet are the top two firms, representing about 42% of the portfolio. Expense ratio comes in at 0.13% (read: ETFs in Focus on GICS Changes: Top Tech & FANG).
Vanguard Communication Services ETF (VOX - Free Report) also targets the communication service sector with Alphabet and Facebook as the top two holdings at 22.3% and 14.7%, respectively. It has AUM of $1 billion and charges 10 bps in annual fees.
The ultra-popular Technology Select Sector SPDR Fund (XLK - Free Report) and Vanguard Information Technology (VGT - Free Report) has now become pure-play technology ETFs with top constituents such as Apple, Microsoft, Visa and Cisco. XLK has AUM of $26.6 billion and charges 13 bps in fees per year from investors, while VGT has AUM of $22.5 billion and comes with an expense ratio of 0.10%.
Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) will also rebalance to reflect the GICS changes. Cable and entertainment stocks like Comcast and Walt Disney as well as streaming stocks like Netflix (NFLX) are being moved to XLC. The ETF has been able to manage $18.3 billion and charges 13 bps in annual fees (read: ETFs to Tap Amazon's Growth and Expansion Story).
Vanguard Consumer Discretionary ETF (VCR - Free Report) has already been phasing out changes using the transition benchmarks. The weightage to Comcast, Walt Disney and Netflix (NFLX) has already been lowered. VCR has amassed $3.2 billion in AUM and charge s10 bps in annual fees.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>