25 Jun 2018

S&P, Dow Jones and MSCI Sector Shuffle

In January 2018, the S&P, Dow Jones and MSCI released a list of 200 companies that will see changes in their sector status.

In late September, the sector mappings around Technology, Consumer Discretionary, and Telecom will be revamped, impacting 8.7% of the S&P 500 index's market capitalization.

There has been a rapid evolution in the way people communicate, access entertainment content and other information. This is a direct result of the integration between telecommunication, media and internet companies. These companies can now provide bundled offerings over multiple mediums to provide content to their customers. Now that technology is really a part of every company and the lines between "tech" companies and "other" become increasingly blurred, the S&P and MSCI indexes are altering the classifications of companies within the industries.

The revised GICS® structure which will be implemented after the close of business (ET) on Friday, September 28, 2018 in GICS Direct. The changes will be implemented in the MSCI Equity Indexes in one step as part of the November 2018 Semi-Annual Index Review.

What is really happening? The Telecommunication Services Sector is being broadened and renamed as Communication Services to include companies that facilitate communication and offer related content and information through various media.

Key changes include:

  • Technology: The weight of Technology of the S&P 500 will decline to 20.6% from 26.2%, with companies such as Alphabet, Facebook, Electronic Arts, and eBay leaving the group.
  • Consumer Discretionary: The sector will decline to 10.1% from 13.2% of the S&P 500, with Media and entertainment-related Internet Retail names, such as Netflix, departing.
  • Communication Services: This newly created group will constitute 10.4% of S&P 500 versus 1.7% for the current Telecom, replacing a bond proxy sector with a more growth aggregation of stocks. The transition of previously categorized Technology names will add 5.6% to this group, with 3.1% coming from Consumer Discretionary

How might sector profiles change:

  • Communication Services may gain growth appeal - as growth companies are added
  • Technology Sector valuations may improve - as expensive growth names are removed
  • Consumer Discretionary may lose growth appeal - as growth names are removed  

Bottom-line: These changes will force the purchase and sale of securities in many popular sector ETFs and index funds and impact the risk management process for many U.S. and global products across styles and the investment spectrum. Money flow could be impacted due to forced rebalancing.