Six months ago, the investment community was preparing for a major shakeup in sector classifications as the indexes behind popular sector funds were changing and mega-cap companies such as Alphabet, Comcast, Facebook and Netflix were shifting to communications services under a sector revamp of the Global Industry Classification Standard (GICS).
With the benefits of hindsight, we can ascertain how ETF investors responded and whether they better understand what they own.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
As a review, some stocks in the information technology and consumer discretionary sectors were moved in September 2018 to a new communications services sector under the framework mutually used by certain S&P Dow Jones and MSCI indices. (Read “How Sector Changes Impact Portfolios)
As of March 15, 2019, the information technology sector (21% of assets) remained the largest sector in the iShares Core S&P 500 ETF (IVV), and communications services (10%) and consumer discretionary (10%) were the fourth- and fifth-largest. For the iShares MSCI Emerging Markets ETF (EEM), information technology (14%), consumer discretionary (13%) and communication services (12%) were also double-digit weightings.
Big Impact For Sector-Focused ETFs
Yet the impact for sector-focused ETFs tied to these broader indexes was much greater.
Six months ago, the market-cap-weighted Technology Select Sector SPDR Fund (XLK) had a 25% weighting in what today is classified as communication services stocks, including Facebook, Alphabet (Google) and Verizon Communications. The fund looks far different than it did back when interactive media and services companies Facebook and Alphabet were among its largest positions.
Though Microsoft and Apple remain the two largest companies in this $20 billion ETF, Cisco, Intel and Visa impact performance more than they did before.
Sector Weights Prior To GICS Changes
Source: CFRA; as of 9/14/2018
Equally Weighted Contrast
In contrast, the $1.6 billion Invesco S&P 500 Equal Weight Technology ETF (RYT) has changed less in the last six months. This ETF—which holds the same stocks as XLK, but the holdings are equally weighted instead of market-cap-weighted—had just an 8% weighting to communication services stocks.
Like XLK, RYT currently owns no communication services stocks. But the change in holdings made less of a difference to RYT, since other equally weighted holdings like Arista Networks (ANET) and Synopsys (SNPS) were more impactful for this equal-weighted strategy.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
