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Upcoming Changes to S&P 500 Industry Sectors Reflect Evolution of U.S. Economy

New communications services sector result of telecommunications, media, and internet companies’ integration

Out with the old. In with the new.

The S&P 500 is getting a new look and, for investors that could mean revisiting your portfolio. Maybe you’ve benefited this year from the more than 18% price gains in the S&P 500 index’s consumer discretionary sector or the nearly 20% rise in the information technology sector. While stocks in those sectors may still end the year among the market’s leaders, they’ll be moving to new homes, so to speak, later this month.

As of the end of trading on September 28, S&P Dow Jones Indices will implement the overhaul of its Global Industry Classification System, or GICS, its widely used system of classifying the stock market into sectors, industry groups and subindustries. Similar changes for indexes overseen by Morgan Stanley Capital International (MSCI) will go into effect in early December.

Among the biggest change is the creation of a new sector called communications services. It will include companies in the telecommunication services sector and also include stocks formerly classified in the consumer discretionary and information technology space.

The formal list of companies on the move will be released later this month but among those leaving the tech sector will be Alphabet Inc., Amazon.com Inc., Facebook Inc. and Twitter Inc., while Apple Inc., Microsoft Corp. and Intel Corp. will remain. Netflix Inc. will move from the consumer discretionary sector to the communications services sector, while telecom services giants like Verizon Communications Inc. and AT&T Inc. will also join the newly created communications services sector. With the media industry group to be discontinued, the new sector is also expected to include 21st Century Fox Inc., Comcast Corp. and Walt Disney Co.

David Blitzer, S&P Dow Jones Indices’ managing director and chairman of the index committee, notes that the old telecommunication services sector was vanishing because it was missing “new and popular ways” that people communicate now. The new sector will include companies whose businesses thrive through networks and delivering content.

“The content of communications used to be spread across different industries and delivery networks. Today, interconnected networks deliver virtually any content to any device over any network,” Blitzer wrote in a July 31 blog post 1.

Evolution Seen in M&A, Bundled Services Offerings

Blitzer points out that Verizon and AT&T, the “bulwarks” of the old telecommunication services sector, now own Yahoo and Time Warner, respectively. (AT&T completed its acquisition of Time Warner in June though the Department of Justice is appealing the deal.)

Comcast owns NBC-Universal while competing with AT&T and Verizon by selling phone service. Slightly over half of smart phones in the U.S operate with Android, while Google and Facebook capture a quarter of global spending on advertising, Blitzer adds.

“The growth of interlinked networks bringing virtually all content together and delivering anything to anyone anywhere is changing the way we view the stock market and driving merger activity,” he writes in the blog post.

The GICS change won’t affect the performance of the broader, capitalization-weighted S&P 500. “However, changes will occur in performance of affected sectors, stock contribution to sector returns, sector contribution to benchmark returns, and traditional performance attribution. In turn, assessments of active managers’ value creation/destruction may be affected,” Philip Murphy, index committee chair for Americas index governance at S&P Dow Jones Indices, wrote in an August 30 blog post 2.

The structural updates to GICS underly that GICS is a “dynamic framework” that seeks to reflect economic evidence and trends, according to Murphy. “Stakeholders utilizing sector-based performance contribution and/or attribution analysis should be aware of these changes and the potential effects they can have on their analyses,” he says in the blog post.

Based on analysis done earlier this year by Bloomberg Finance and State Street Global Advisors (SSGA), the new communications services sector will likely comprise roughly 31% consumer discretionary, 50% technology and 18% telecommunications stocks.

Overall, it’s expected that more than 8.0% of the S&P 500’s market capitalization will be reclassified. “This will create a new landscape of growth-oriented exposures and the need for investors to reconsider their sector investing due diligence approach,” SSGA said in a blog post 3 in May.

 

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Sources:

1 http://www.indexologyblog.com/2018/07/31/why-is-the-gics-telecommunications-sector-becoming-the-communication-services-sector/

2 http://www.indexologyblog.com/2018/08/30/relative-performance-impacts-from-the-introduction-of-communication-services/

3 https://www.ssga.com/blog/2018/05/gics-changes-to-telecom-will-add-more-growth-names.html

S&P Dow Jones and MSCI Announcement:

https://www.msci.com/documents/10199/dd19f706-a28c-48a1-b940-88254bb91581

S&P 500 Sector Price Returns:

https://us.spindices.com/documents/commentary/market-attributes-us-equities-201808.pdf?force_download=true

 

 

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