S&P DJI, MSCI embark on latest GICS consultation

Oct 25th, 2021 | By | Category: ETF and Index News

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S&P Dow Jones Indices and MSCI have launched their latest consultation with members of the investment community on potential changes to the Global Industry Classification Standard (GICS).

S&P DJI, MSCI embark on latest GICS consultation

The proposed changes to GICS could impact ETFs targeting energy, utilities, information technology, industrials, and financials sectors.

The GICS structure was initially launched in 1999 with 10 sectors, 23 industry groups, 59 industries, and 123 sub-industries.

It has evolved over time and currently comprises 11 sectors, 24 industry groups, 69 industries and 158 sub-industries.

According to the index providers, periodic reviews are intended to ensure that GICS remains reflective of current markets and continues to be an accurate and complete industry framework.

Previous notable changes include the creation of the real estate sector in 2016 by spinning out related companies from the financial services sector as well as the broadening of the telecommunication services sector (now renamed as the communication services sector) to include certain major tech-enabled companies previously classified within the consumer discretionary or information technology sectors.

While the current consultation covers seven areas, the proposed reclassifications of renewable energy companies and firms involved in data processing and outsourced services have the potential to affect ETF investors.

The consultation will run until 20 December with any approved changes to the GICS structure announced by February 2022.

Renewable energy

S&P DJI and MSCI have proposed consolidating all types of energy producers and related equipment and service providers under the energy sector.

The current GICS structure classifies conventional energy producers involved with oil, gas, consumable fuels, and related equipment under the energy sector, whereas companies that generate electricity using renewable as well as non-renewable sources are classified under the utilities sector.

Manufacturers of renewable energy equipment, meanwhile, are classified under the information technology or industrials sectors.

The rationale for the reclassification is to reflect the changing energy market where innovation and declining costs are driving producers of renewables to become significant competitors to traditional energy providers. The new format would focus on distinguishing between energy generators, which would be consolidated under the energy sector, and the firms distributing energy to end users, which would remain in the utilities sector.

The result would be decreasing diversification for the industrials, information technology, and utilities sectors, and enhanced diversification for the energy sector, although the immediate net impact on each sector would likely not be significant.

While the relationship between oil prices and the share prices of renewable energy companies is somewhat complicated, it is also expected that the reclassification would decrease the energy sector’s sensitivity to oil shocks and provide somewhat of a cushion against the long-term decline of crude oil.

GICS-linked energy sector ETFs include the US-listed $27.6 billion Energy Select Sector SPDR Fund (XLE US) and $6.0bn Vanguard Energy ETF (VDE US), both of which focus on US-listed equities. In Europe, the $1.8bn Xtrackers MSCI World Energy UCITS ETF (XDW0 LN) covers developed markets globally, while the $550m iShares S&P 500 Energy Sector UCITS ETF (IESU LN) targets US-listed large-cap energy firms.

Data processing and outsourced services

S&P DJI and MSCI have also proposed moving the data processing and outsourced services sub-industry from the information technology sector to the industrials sector. Some data processing and outsourced services companies, however, would be reclassified to the financials sector under a new transaction and payment processing services sub-industry.

Companies classified within the data processing and outsourced services sub-industry offer services either customized for select industries, such as human resources or travel, or to diverse industries as is the case with transaction and payment processing companies that connect consumers, financial institutions, merchants, governments, digital partners, businesses, and other organizations.

According to the index providers, these support activities are closely aligned with the business support activities covered under the industrials sector rather than the information technology sector, and with the financials sector in the case of payment processors.

The reclassification would see major information technology companies such as Visa, Mastercard, and PayPal switch to the financials sector, while other significant firms such as Automatic Data Processing, Paychex, and Financial National Information Services would migrate to the industrials sector.

If implemented, the changes would bring about a significant rebalance in related sector ETFs as well as shake up the sectors’ diversification profiles. In terms of the information technology sector, the reclassification would enable current mid-cap stocks to play a greater role in driving overall performance.

Notable sector ETFs in the US include the $52.5bn Vanguard Information Technology ETF (VGT US), the $12.0bn Vanguard Financials ETF (VFH US), and the $5.3bn Vanguard Industrials ETF (VIS US).

In Europe, the most notable ETFs are the $3.2bn iShares S&P 500 Information Technology Sector UCITS ETF (IITU LN), the $1.9bn iShares S&P 500 Financials Sector UCITS ETF (UIFS LN), and the $610m Xtrackers MSCI World Industrials UCITS ETF (XDWI LN).

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