Sector Shuffle Not Taxing At All

September 28, 2018

It even showed up in the $142 million SPDR S&P Software & Services ETF (XSW), which saw $31 million enter on Sept. 20, then $27 million exit on Sept. 24:



Sources:, FactSet; data from Sept. 1 to Sept. 25, 2018


S&P Transitions Its Indexes

The heartbeat pattern has emerged in these particular funds at this particular moment in time because of rebalancing.

On Sept. 21, the S&P indexes on which the Select Sector SPDR Funds are based were rebalanced to incorporate the new GICS classification revisions. The goal was to be rebalanced by the open of markets on Sept. 24, coincident with the usual quarterly rebalance.

Over the course of several days, tech ETFs based on the former information technology sector had to sell off stocks that would be moving to the new communication services sector. To avoid realizing capital gains during those transactions, State Street used the ETF redemption process to swap, instead of sell, those stocks whose classifications are changing. That heartbeat pattern is the footprint indicating just such a trade occurred.

The new Communication Services Select Sector SPDR Fund (XLC), meanwhile, simply had to purchase new stocks as needed, or use in-kind creations in much the same way. No heartbeat pattern should be expected to show up in XLC's flows data—and indeed, none does:


Sources:, FactSet; data from Sept. 1 to Sept. 25, 2018


Since Sept. 1, XLC has taken in $1.01 billion in new investment assets, including $335 million on Sept. 25 alone. Expect these flows to rise as investors continue to transition their portfolios to adapt to the new sector breakdowns.

Why Not Elsewhere?

Intriguingly, the heartbeat pattern hasn't emerged in most iShares products based on the GICS system. The one exception is IXN, which saw inflows of $302 million on Sept. 20, then outflows of $305 million on Sept. 24:


Sources:, FactSet; data from Sept. 1 to Sept. 25, 2018


The reason for this is that, apart from IXN, most iShares ETFs based on GICS classifications won't be making huge rebalances at this time.

The iShares Global Telecom ETF (IXP), for example, actually became the iShares Global Comm Services ETF, effective Sept. 24—meaning that it is now a globally focused competitor to XLC. It will need to buy up new stocks rather than sell off old ones (telecom is remaining a division of communication services in the new GICS arrangement), so no in-kind redemption process will be necessary to rebalance its portfolio.

Meanwhile, the iShares North American Tech ETF (IGM) and the iShares North American Tech-Software ETF (IGV) are based on indexes that won't be reconstituted until Dec. 21, according to iShares.

Heartbeats In VGT & VCR Return

And what of Vanguard's VGT and VCR? The heartbeat has made a return to those funds in recent days as well: $66 million flowed into VGT on Sept. 21, only for $65 million to flow out on Sept. 25. Meanwhile, $9 million flowed into VCR on Sept. 21, only for $9 million to flow out on Sept. 25.

Eagle-eyed readers will note that the magnitude of those flows is substantially smaller than the ones we noted back in August. It appears that after all that work earlier this summer, Vanguard only needed to make a few tweaks before its ETFs' transitions were complete.

So for investors in these popular ETFs at least, it looks like the potential for a nasty tax shock as a result of the GICS changes is slim indeed.

Contact Lara Crigger at [email protected]

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