The largest change in Wall Street’s broad sectors since 1999 just happened in September, with a readjustment of the technology and media sectors. Last year, S&P Dow Jones and MSCI had announced big changes to the Global Industry Classification Standard (GICS) that widened the outdated telecommunication sector and renamed it to communication services sector, effective Sep 24, 2018.
The change essentially reclassifies some of the popular, high-growth tech and media stocks, with telecom stocks, lumping that all into a newly-created communication services sector. This is the first sector change on the S&P 500 since real estate was cut from the financial sector to become the 11th sector two years ago.
The telecommunications sector, known for defensive bets based on the inclusion of highest-dividend yield stocks, has now gotten riskier and cyclical with a new coat of paint. This is especially true as the newly created sector has increased from three to more than 20 companies, adding some key names from the technology and the consumer discretionary sectors.
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 sector. Meanwhile, Amazon (AMZN) remains in the consumer discretionary space, with increased weightings to 25%. With the big change to the components, tech stocks now account for 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.
ETFs To Focus On
Communication Services Select Sector SPDR (XLC) is a newly created ETF focusing on the new communication sector. It was started in June and has built up $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%.
Vanguard Communication Services ETF (VOX) also focuses on 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 very popular Technology Select Sector SPDR Fund (XLK) and Vanguard Information Technology (VGT) has now morphed into pure-play technology ETFs with leading 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) will also change to reflect the GICS adjustments. 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.
Vanguard Consumer Discretionary ETF (VCR) has already been making 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.
Stock Market Affect
A big sector adjustment that goes along with the quarterly expiration of futures and options resulted in 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.