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S&P SECTOR SWITCHEROO

WEEKLY MARKET COMMENTARY - 04/09/2018

S&P GICS sectors to undergo a significant makeover later this month.

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, but this one will be quite meaningful—even more so than the addition two years ago this week of real estate as an S&P GICS sector. Here we discuss the implications of creating the new communication services sector and changes to the consumer discretionary and technology sectors.

WHAT’S HAPPENING

About three weeks from now, the telecommunication services sector will be greatly 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. In fact, after the changes, three of the original four “FANG” stocks (Facebook, Amazon, Netflix, and Google) will be part of the new communication services sector. The information technology sector, which will be impacted most, will see about 5 percentage points trimmed from its current 26% weight in the S&P 500 Index. The haircut for consumer discretionary will be smaller at just under 3 points (from 12.8% to 10.1%), and is tempered by eBay’s move from technology to consumer discretionary. The end result is that the S&P 500 Index weighting for the telecom services sector—rebranded as communication services—will increase from 2.0% to 10.1% [Figure 1]. Given that more than 8% of the S&P 500 is being reclassified, these changes will have the biggest impact on the sector landscape in the history of the GICS.

John Lynch Chief Investment Strategist, LPL Financial
Jeffrey Buchbinder, CFA Equity Strategist, LPL Financial

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