Big changes are coming later this month to the way the financial world categorizes some of the country’s biggest companies. The telecommunications sector—currently home to just three stocks—is being expanded to accommodate some of the biggest names in the technology and media worlds: Namely, Facebook and Alphabet (the parent company of Google) will move over from the technology sector, while Netflix and Disney will jump in from the consumer discretionary sector. Other companies will also be moving in.
While this might sound like inside baseball, the shakeup could actually lead to some real changes in some investors’ stock portfolios—particularly for investors who invest in the information technology or consumer discretionary sectors through sector-focused funds.
Let’s take a closer look.
Why the change?
The migration, which will happen after the markets close on Sept. 28, aims to account for the way technology has suffused our economy, becoming integral to just about every industry. The tech sector already occupies the biggest spot on the broad S&P 500® Index. Without a change, it might have continued to mushroom.
“Index-managers MSCI and S&P Dow Jones seem to have decided—appropriately, in our view—that technology has advanced to the point that a line should be drawn between those who use technology and those who produce technology,” says Brad Sorensen, managing director of market and sector analysis for the Schwab Center for Financial Research.
And the implications will be far-reaching. First of all, the injection of companies into the telecommunications sector will cause it to gain some weight—expanding from a 2% share of the S&P 500 Index to about 9%, according to an estimate by Cornerstone Macro Research.1 At the same time, the tech sector will shrink to about 22% of the S&P 500 Index from 26% now, while the consumer discretionary sector will decline to 10% from 13%, according to Cornerstone’s calculations.
Implications for investors
If you hold sector-specific funds for the tech or consumer discretionary sectors, you may already have noticed the funds selling the stocks of the companies that are moving. That means your portfolio could be changing without you having to buy or sell anything—so be sure to check your allocations. If your funds no longer give you access to the shares you want, you may have to sell some tech and discretionary stocks and buy some communications stocks.
Another thing to note: Sales by these funds could result in gains that show up in your tax bill, so it’s worth checking with the fund management company.
Speaking more broadly, this change should be good for investors as the re-classification is aimed at making sure the sectors are more accurate.
“The changes better reflect what’s actually going on in the economy, which should allow you to have a more diversified and better-informed portfolio,” Brad says. “We have the sector classifications, in part, to give investors a relatively easy way to determine whether a portfolio is well-exposed to various parts of the economy. The new designations will make it easier to analyze the various sectors.”
“For example, we had some concerns that investors were a little too enthusiastic about some of the more famous names in the social media and media businesses, which had helped push up valuations for the entire tech sector,” he says. “Moving some of those companies into the new sector should leave the rest of the sector with a much more attractive valuation.”
1Source: Cornerstone Macro Research, based on values as of 7/31/18.