Seismic Sector Shift To Shake Up 30 ETFs

November 20, 2017

Netflix Joins The New Sector

The media and entertainment industry group, meanwhile, will yank the erstwhile media industry group from the consumer discretionary sector and put it into the new communications services sector, breaking up its constituents into three new industry groups: media, entertainment, and interactive media and services.

The media industry group will contain advertising, broadcasting, cable and satellite, and publishing companies, while the entertainment industry group will focus on entertainment products and services providers, as well as online entertainment streaming companies. Interactive home entertainment content, such as games or mobile gaming apps, will fall into the entertainment group as well.

Notably, that change would almost certainly move Netflix from Consumer Discretionary into the new Communications Services sector. Netflix is a top 10 holding in consumer discretionary ETFs like the $11.9 billion Consumer Discretionary Select Sector SPDR Fund (XLY), the $2.2 billion Vanguard Consumer Discretionary ETF (VCR) and the $298 million Fidelity MSCI Consumer Discretionary ETF (FDIS), all of which follow the GICS standard.

One-Stop Shop For FANG Stocks

The final category in the media and entertainment industry group would be the interactive media and services industry group, which will rope in companies that create and distribute content and information through proprietary platforms, and whose revenues are derived mostly through pay-per-click ads. These include search engines, social media and networking platforms, online classifieds and online review companies.

Pulling search engines and social media platforms into the new sector will almost certainly reclassify Alphabet (Google's parent company), Apple and Facebook, all of which are currently classified as information technology, under its internet software and services sub-industry group.

In turn, that will likely substantially rejigger the lineup of funds like the $16.6 billion Vanguard Information Technology ETF (VGT), the $1.5 billion Guggenheim S&P 500 Equal Weight Information Technology ETF (RYT) and the $1.3 billion Fidelity MSCI Information Technology Index ETF (FTEC). Alphabet, Apple and Facebook alone comprise 31% of both VGT and FTECs' portfolios. (However, these three companies make up much less of equal-weighted RYT's portfolio—just 4.3%.)

Under the new rules, the FANG stocks will very likely all reside under one sector classification for the first time. If so, they would almost certainly become the engine of growth for the new communications services sector, especially considering that technology stocks, led by these four stocks and Microsoft, accounted for 75% of the S&P 500 Index's gains in October (see: "4 Horsemen of Stock ETFs").

Online Marketplaces Switch Sectors

One thing is for certain: Facebook, Apple and Google will all be reclassified, since their former home, the internet software and services sub-industry group, is being discontinued.

Instead, a new sub-industry group will be created in information technology, under its IT services industry, called internet services and infrastructure. That will cover companies providing services and infrastructure for the internet industry, including data centers, cloud networking and storage infrastructure and web hosting services. This may impact the $4 million SPDR S&P Technology Hardware ETF (XTH), which includes data storage companies like Seagate and NetApp.

Furthermore, the internet and direct marketing retail sub-industry group, which exists under the consumer discretionary sector, will be updated to include online marketplaces and e-commerce companies, regardless of whether they hold inventory.

That particular change likely won't impact Amazon, Priceline or Expedia, all of which are already classified under the internet and direct marketing retail sub-industry group. But it could impact companies like eBay or, both of which currently reside in the vanishing internet software and services category.

The full list of companies affected by the sector changes has not yet been announced. A list of select large-caps affected will announced in January 2018, while the full list of stocks affected will be released no later than August.


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