Some of the largest ETFs in the U.S. got their first glimpse at companies that might get moved around in a potential change to the GICS classification system in 2023.
S&P Dow Jones and MSCI released a pro forma list of companies with more than $2 billion in market capitalization that could be affected by a change in the co-managed industry list on Friday, the first update in a consultation period that started in October.
While the two index providers caution that the list is only for early analysis, the timeline for confirmed changes is already underway. Market participants can submit feedback on broad potential changes up until Feb. 18, and final changes, if any, are scheduled to be announced no later than this March.
The indexes will then have a year to adapt before the changes are formally introduced in March 2023.
The process of reshaping parts of the GICS could potentially reshape the top holdings of funds carrying hundreds of billions of dollars in assets. More than $474 billion in assets are tied to ETFs that track indexes of the 11 core sectors, according to ETF.com data.
Information Tech, Energy Shuffles?
Multiple proposed changes in the consultation either consolidate or remove subindustries underneath an entire sector, leaving minimal changes to the ETFs that track them.
However, S&P Dow Jones and MSCI have suggested moving two key subindustries out of the information technology sector by moving data processors and outsourcing agencies to industrials and payment processors into financials.
Names like Visa, Mastercard, ADP and PayPal are listed as candidates for removal from the technology sector under that reorganization. Those companies account for more than 5% of the weight in the Technology Select Sector SPDR Fund (XLK) and the Vanguard Information Technology ETF (VGT), which, combined, hold more than $100 billion in assets.
It would amount to the largest change to the information technology sector since internet giants like Meta and Alphabet were moved into the communications sector in 2018.
Utilities ETFs could also lose some diversity, as renewable energy providers are being set to move to the energy sector. That move would consolidate power generation companies together regardless of whether that power is renewable or not, and keep companies that send that energy to end-users in utilities.
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Matt Bartolini, head of research at SPDR Americas Research under State Street Global Advisors, said his firm is preparing an information blitz to shareholders of its sector-tracking ETFs once it has confirmation of any potential GICS changes.
“In terms of what we're doing or preparing to do, it's going to be a carbon copy of how we communicated the exchanges to our clientele back in 2018,” he said.
Editor's note: this story previously said that NextEra Energy could move from the utilities sector to the energy sector. NextEra Energy itself is not currently positioned to move sectors, but its subsidiary NextEra Energy Partners LP is.