Potential Changes In Index Sector Funds

July 18, 2017

Revamping GICS
Changes to the GICS structure have occurred periodically in the past, most recently and prominently with the 2016 elevation of real estate. REITs were lifted out of the financials sector and formed a new 11th sector. At that time, GICS-related sector ETFs, such as the Financial Select Sector SPDR (XLF), exited positions in American Tower, Simon Property Group and other REITs. Investors wanting S&P 500 real estate exposure focused on the Real Estate Select Sector SPDR (XLRE).

However, CFRA thinks the potential impact of a new communications services sector would be more significant. The above stocks are widely held by GICS-based sector ETFs from the four largest ETF providers—iShares, Vanguard, SSGA and PowerShares—as well as Fidelity and Guggenheim. More significantly, some firms would need to make ETF constituent adjustments in three of their sector products, not just one as occurred with the real estate carve-out.

Affected Sectors
Starting with the consumer discretionary sector, there is approximately $15 billion in diversified sector ETFs that CFRA thinks would be affected, though their exposure to the potentially impacted companies is distinct.

For example, the largest industry groups for the market-cap-weighted S&P 500 based Consumer Discretionary Select Sector SPDR (XLY) are media (24% of May assets) and internet and catalog retail (22%); the latter includes internet and direct marketing companies such as Expedia and Netflix, but also Amazon.

Based on CFRA’s initial review of the proposed changes, we think Amazon could stay in the consumer discretionary sector along with specialty retail companies (17%) and hotels, restaurants & leisure firms (14%). Comcast, Disney and Time Warner are among the largest holdings.

In contrast, the Guggenheim S&P 500 Equal Weight Consumer Discretionary (RCD) has more specialty retail (22% of assets) and less media (15%) exposure, despite holding the same S&P 500 constituents. However, RCD equally weights retailer Best Buy and Comcast despite the latter have a market cap 10 times the size of the former.

Meanwhile, the Vanguard Consumer Discretionary ETF (VCR) and the Fidelity MSCI Consumer Discretionary Index ETF (FDIS) both aim to replicate market-cap-weighted multicap MSCI indices. Relative to XLY, exposure is lower for media (22% of assets for both) and internet and catalog retail (19% for both), but is higher for hotels, restaurants and leisure (17% for FDIS and 16% for VCR).

Vanguard also offers the Vanguard Consumer Discretionary Index (VCDAX) in a mutual fund wrapper, tracking the same MSCI index as VCR. The two are separate share classes within the same parent fund.

 

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