Sector ETFs set to be impacted by changes to GICS

Nov 21st, 2017 | By | Category: ETF and Index News

MSCI and S&P Dow Jones Indices (SPDJI) have announced changes to the Global Industry Classification Standard (GICS) that will see the telecommunication services sector being broadened and renamed as communication services.

The changes to the GICS sector classifications will take effect from September 2018.

The reclassification will impact ETFs that track the information technology, consumer discretionary and telecoms sectors, and could potentially see consumer discretionary stocks such as Netflix, Disney, Comcast and Time Warner, and tech stocks such as Apple, Google, and Facebook, move to the newly created communications services sector.

Given the outsized impact these tech giants’ recent performance has had on the returns of the broader information technology sector, the changes could make information technology ETFs significantly less attractive to investors.

MSCI and SPDJI are seeking to realign the GICS so that companies are classified by the service they provide to consumers rather than the means of delivery. David Blitzer, chairman of the index committee at S&P Dow Jones, said: “The GICS structure continues to evolve to align peers and focus on a company’s core business when assigning classifications. The internet began as a technological approach to sharing information; it has become the way many businesses operate. The lines among media, communications, and content are blurred. It is time to acknowledge this convergence and the overlapping services these companies provide. The communication services sector addresses this progression.”

The new sector will include two industry groups, the current telecommunications services industry group in its present form, and media & entertainment.

The telecommunication services industry group will remain in the communication services sector and continue to include providers of telecommunication services and related services. In addition, internet service providers offering internet access to end users will be classified here.

The media & entertainment industry group will move out of the consumer discretionary sector (where it is presently called the media industry group). It will contain three industries: media, entertainment, and interactive media & services.

The media industry will include companies engaged in advertising, broadcasting, cable & satellite and publishing. The entertainment industry will contain companies involved in producing and selling entertainment products and services. It will now also include online entertainment streaming companies as well companies producing video games and mobile gaming applications. The interactive media & services industry will include companies engaged in content and information creation or distribution through proprietary platforms, where revenue is derived primarily from pay-per-click advertising. This will include search engines, social media and networking platforms, and online review companies.

The changes will affect ETFs that track information technology stocks such as the iShares S&P 500 Information Technology Sector ETF (IITU LN), which currently has major weights assigned to Apple (16.1%), Google (11.3%) and Facebook (7.8%). However, the changes will not affect all ETFs equally – the SPDR S&P US Technology Select Sector UCITS ETF (SXLK LN), already tracks the information technology and the telecommunications services sectors and will therefore likely not have to divest from the large tech stocks it currently holds.

Consumer discretionary ETFs, such as the iShares S&P 500 Consumer Discretionary Sector ETF (IUCD LN) and the SPDR S&P US Consumer Discretionary Select Sector UCITS ETF (SXLY LN), will also be affected, potentially losing companies such as Comcast, Walt Disney, Time Warner and Netflix that currently make up a significant portion of their weight.

Other changes include the internet & direct marketing retail sub-industry in the consumer discretionary sector being updated to include companies providing online marketplaces for consumer products and services. The sub-industry will include e-commerce companies regardless of whether they hold inventory, a change that will move companies such as eBay from information technology to consumer discretionary.

The final change will see the creation of a new sub-industry called internet services & infrastructure in the services industry. This sub-industry will include companies providing services and infrastructure for the internet industry including data centres, cloud networking & storage infrastructure, and web hosting services.

Sebastien Lieblich, managing director and global head of equity solutions research at MSCI, commented: “The GICS structure is evolving to stay abreast with the ever-changing business environment. Convergence between telecom and media companies is not just a trend but a fact. Companies in these two industries are clearly finding synergies between creation of content and its delivery. The proposed communication services sector reflects this evolution.

“Also, the universal nature of the internet has led to it being integrated in almost all aspects of communication and business transactions. Online marketplaces and e-commerce companies are slowly and surely increasing their share of the overall retail segment and should be classified under internet retail to align with the underlying business.”

Blitzer added, “There is no longer any question that all e-commerce belongs in retail. Online marketplaces will move to internet & direct marketing retail to ensure that companies are classified according to their underlying business.”

The GICS guidelines were developed jointly by MSCI and S&P Dow Jones Indices and launched in 1999 with 10 sectors, 23 industry groups, 59 industries and 123 sub-industries. The structure has evolved over time and will comprise 11 sectors, 24 industry groups, 69 industries and 158 sub-industries when the latest changes take effect. The most notable change thus far came in 2016 when real estate was spun out of the financial services sector to become a sector in its own right.

The GICS structure is reviewed annually to ensure the classification remains appropriate to represent the global equity markets. The GICS revision is the result of a consultation with members of the global investment community.

The changes will take effect after the close of business on 28 September 2018.

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