In a move that is sure to spawn investor confusion and market turmoil, the old lineup of S&P 500 industry sectors is no more. A major objective was to break up the information technology sector, which had ballooned in value to represent roughly 26% of the capitalization-weighted S&P 500 Index (SPX). The old telecom sector has been renamed communications services, bolstered by 23 stocks with a combined market cap of nearly $3 trillion, per reports by CNBC and The Wall Street Journal. Of these 23 stocks, six formerly were in information technology, and 16 were in consumer discretionary, according to an earlier CNBC report. Most notable among the new communications services stocks are FAANG members Facebook Inc. (FB), Netflix Inc. (NFLX) and Google parent Alphabet Inc. (GOOGL). (For more, see also: 3 Tech Stocks Nearing a Breakout.)
The shakeup is bound to have major consequences for investors in passive ETFs, who should be re-evaluating their holdings right now. "It is very important for investors to understand how the reclassification will affect their portfolios, since the ETFs that they currently hold may no longer suit their investment objectives," advises Neena Mishra, director of ETF research at Zacks Investment Research, as quoted by CNBC.
5 Ways The Tech Shuffle Is Creating Market Turmoil
|Many funds, especially passive ETFs, must overhaul their portfolios|
|A major defensive sector play has been eliminated|
|The new communications sector is tech-heavy and concentrated|
|Telecom's dividend yield has plummeted|
|The tech sector still has outsized weight|
ETF Portfolio Overhaul
Alphabet and Facebook had represented roughly 15.6% of the value of technology sector ETFs, and now will exert even greater influence on the new communications services sector, per CNBC, which estimates that these two stocks will represent about 45% of the latter's value. Meanwhile, Apple Inc. (AAPL) will jump to almost 20% of the tech sector's value. Nick Colas, co-founder of DataTrek Research tells investors that holders of a tech or communications ETF must recognize that it is now "a different animal" and should ask themselves if they still want to own it, CNBC reports.
Defensive Play Gone
The old telecom sector had been a major defensive play for investors, but the new communications sector is tech-heavy, with a dividend yield that is dramatically lower and a valuation that is drastically higher, as detailed below. Neena Mishra of Zacks said this, per CNBC: "The telecom sector is traditionally seen as a defensive sector and a value play. The revamped communications services sector will be seen as a cyclical sector with much stronger growth prospects." Telecom was 100% value stocks, but communications is 61% growth stocks, CNBC notes. Consumer staples is now the only defensive sector left, says Kim Arthur, CEO of San Francisco-based Main Management. (For more, see also: Tech Stocks' Growth Engine Faces a Big Slowdown.)
Tech-Heavy and Concentrated
As noted above, Facebook and Alphabet represent about 45% of the new communications services sector. Meanwhile, the two biggest stocks in the revamped tech sector, Apple and Microsoft Corp. (MSFT), combine for only about 30% of its value. Based on the 10 largest stocks in each sector, communications is more concentrated than either technology or consumer discretionary.
Overall, the new communications sector will be 52% tech stocks, 28% consumer discretionary, and just 20% telecom. Interestingly, the 61% proportion of growth stocks in communications services is greater than their 47% share of the post-adjustment tech sector, and the forward P/E is leaping from 11 times earnings for the old telecom sector to 28 times earnings for communications services, per reserch by State Street and CFRA cited by CNBC.
Dividend Yield Way Down
The old telecom sector led the S&P 500 with a robust 5.4% dividend yield. The revamped communications sector sees that plummet to 1.7%, below the 1.9% yield for the entire S&P 500.
Tech Remains Big
The reshuffling reduces the weight of the technology sector from 26% to 20% of the S&P 500, leaving it still the biggest sector. Also, the reclassification game does not change the fact that the five biggest S&P 500 stocks, all members of the FAAMG group, still account for about 15.6% of the value of the entire index. The FAAMGs include Facebook, Apple, Microsoft, Alphabet and Amazon.com Inc. (AMZN), which remains in consumer discretionary. In conclusion, one might say that a tech stock by any other name remains a tech stock.