Alphabet Inc., Facebook Inc., Netflix Inc. and others will be in focus on Sept. 24 when they are moved out of the tech and consumer discretionary sectors into a deepened pool of communication and media stocks.
In the largest-ever shakeup of the Global Industry Classification Standard, the telecommunication services sector will be renamed “communication services” and include 18 companies pulled from consumer discretionary and technology, including Netflix, Walt Disney Co. and Twitter Inc.
S&P Dow Jones Indices and MSCI have maintained the widely used business classification system since 1999, and the rearrangement is meant to reflect how the tech, media and consumer industries have evolved.
Stocks being shifted account for about 8 per cent of the S&P 500, and S&P subindexes will reflect the changes once trading starts on Sept. 24.
The communication services sector will include three out of the four FANG stocks – Facebook, Amazon.com Inc., Netflix and Google-owner Alphabet – even though investors widely consider them the leaders of the tech rally that powered the stock market higher in recent years.
Alphabet and Facebook will leave technology and Netflix will by moved out of consumer discretionary to join to the renamed sector. Amazon will stay put in consumer discretionary.
The technology sector’s weight in the S&P 500 will shrink to 20 per cent from 26 per cent.
Its largest remaining constituents will be Apple Inc., Microsoft Corp., Visa Inc. and Intel Corp. After the shuffle removes the influence of some of the biggest companies from the sector’s performance, chipmakers, cloud-computing sellers and other tech constituents may have more of a chance to shine.
Exchange-traded funds that passively track sector indexes have about US$89-billion invested in technology, more than any other sector, according to data from Thomson Reuters Lipper.
Trading could be volatile on Friday for stocks caught in the shakeup as some of those tech ETFs, along with index funds focused on consumer discretionary and telecoms, adjust their portfolios.
But some of the heavy lifting is already complete.
Leading fund provider Vanguard Group started transitioning its sector ETFs in the June quarter, while State Street Global Advisors has already launched a new fund tracking communication services.
The Communication Services Select Sector SPRD Fund has fallen 3 per cent since its June debut, partly because Facebook, its second-largest holding, tumbled 16 per cent on growing regulatory concerns.
Communication services will account for 11 per cent of the S&P 500, up from less than 2 per cent in its current configuration as the telecom sector.
Consumer discretionary will make up 11 per cent of the S&P 500, down from 13 per cent. Amazon’s weight within consumer discretionary will rise to 34 per cent from 27 per cent, with Home Depot Inc. and McDonald’s Corp. the next largest components.
S&P 500 communication services companies will have an aggregate valuation of 18 times expected earnings after the shakeup, compared with 10 times for the current S&P 500 telecom constituents: AT&T Inc., CenturyLink Inc. and Verizon Communications Inc.