Previewing September’s Big Sector Shuffle

This coming September, the Telecommunications Services sector will be renamed to Communications Services. Under this new name, this sector will be broadened to include companies that have historically been included in the Consumer Discretionary and Information Technology sectors. This is (literally) a big deal! We can get a preview of the impact by looking at the holdings of the affected Sector SPDR ETF’s. As the table above shows, we can expect almost $3 trillion of market capitalization will move into the newly-named sector. Roughly $2 trillion of this total is composed of stocks that will move out of the XLK (Technology) ETF into the XLC (Communications) ETF. Another c. $870 billion of market cap will move from the XLY (Consumer Discretionary) ETF into XLC. Investors of all stripes – passive, active, and hybrid – will need to pay attention to this reclassification. As active managers, we will be watching closely to evaluate changes to our relative portfolio exposures among the affected sectors. We expect that the new weighting of the Consumer Discretionary and Information Technology sectors will go down, while the weight of the Communications Services sector will obviously increase substantially in the benchmark indexes. It would not be surprising to see some market volatility over the next few months as asset managers, institutional investors and ETF sponsors adjust their portfolios to reflect the modified sector holdings. Longer-term, we think the new GICS sector classification will better reflect the increasing convergence between communications, broadcasters, media content creators, and internet companies.

 

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