Last year, Standard & Poor's (S&P) and MSCI Inc., two of the largest providers of indexes for use by issuers of exchange-traded funds (ETFs), said that the telecommunications sector was getting a new look. S&P Dow Jones Indices confirmed Thursday that the Communication Services Select Sector Index, the first benchmark dedicated to the new communications services sector, is live. With telecom transforming to communications services, big changes are in store for the sector classifications of some big-name stocks as well as some well-known sector ETFs.
Previously, the telecom sector – one of the smallest sector weights in the S&P 500 – and the related ETFs were dominated by Verizon Communications Inc. (VZ) and AT&T Inc. (T). By pulling some stocks out of the consumer discretionary and technology sectors, the communications services move refreshes the often boring telecom group. (See also: Big Changes Are Lurking for Popular Sector ETFs.)
From the consumer discretionary sector, the media, entertainment, interactive media and services, and interactive home entertainment sub-industries will be added to the new communications services group. "The index has 26 constituents with a total market cap of $2.35 trillion, average market cap of $92.5 billion and median market cap of $34.9 billion as of May 16, 2018," said S&P.
In addition AT&T and Verizon, the top 10 holdings in the new Communication Services Select Sector Index will include three of the four FANG stocks – Facebook, Inc. (FB), Netflix, Inc. (NFLX) and Google parent Alphabet Inc. (GOOGL) – as well as The Walt Disney Company (DIS). That means the Technology Select SPDR ETF (XLK) and other technology ETFs will part ways with Alphabet and Facebook. Consumer discretionary ETFs tracking S&P and MSCI benchmarks, such as the Consumer Discretionary Select Sector SPDR ETF (XLY), will lose exposure to Netflix and Disney.
"The Communication Services Select Sector Index returned a cumulative 143.5 percent through May 16, 2018, with annualized performance of 14.2 percent over three years, 12.7 percent over five years and 9.9 percent over ten years," said S&P. The back-test period ran from late 2007 through April 30, 2018.
Within the new index, over 89 percent of the components are currently classified as discretionary or tech stocks, while the remaining 10.8 percent are traditional telecom names. S&P note did not mention when ETFs will debut to track the new Communications Services Select Sector Index. Sector SPDR ETFs use the Select Sector series as their underlying benchmarks. (For more, see: How Tech Reshuffling by S&P May Shake Up the Stock Market.)