Potential Changes In Index Sector Funds

July 18, 2017

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

Heads up, investors in consumer discretionary, information technology and telecom services index funds: What’s inside these passively managed products may be changing next year if the potential creation of a GICS communication services sector moves forward, as S&P Global and MSCI jointly proposed.

The proposed communications services sector could include companies in the aforementioned telecom sector, including AT&T and Verizon Communications; companies in the

consumer discretionary sector, including Comcast, Disney, Expedia, Netflix and Time Warner; and technology companies, including Alphabet, eBay, Electronic Arts, Facebook and Twitter.

Beyond these S&P 500 constituents, additional smaller-cap companies that could be impacted include Cincinnati Bell and World Wrestling Entertainment. More info can be found in the GICS consultation slides.


Sector Changes Could Be Coming For These S&P 500 Constituents

Stock Examples Current GICS Sector Future GICS Sector?
AT&T and Verizon Communications Telecom Services Communication Services
Facebook and Twitter Information Technology Communication Services
Disney and Netflix Consumer Discretionary Communication Services

GICS Consultation Document, July 11, 2017


Some look at passive sector ETFs in conjunction with active mutual fund alternatives, with a focus on relative performance success. However, CFRA believes the GICS changes highlight the importance of holdings-level analysis that we employ, since soon the three-year records of iShares, Vanguard, SSGA and other impacted sector ETFs would focus on the success of stocks no longer in the portfolios. While active technology-focused mutual fund managers can choose whether to own or sell Google, passive ETF managers need to follow index providers’ decisions.  

In this piece, we offer a take on what this could mean for ETF investors, as S&P Dow Jones Indices and MSCI just started their related consultation. We expect changes to the GICS structure to be announced this year. As such, CFRA expects the aforementioned stocks and many others to remain constituents in their current sectors at least well into 2018.


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