Major sector ETFs face risk of large tech companies being reclassified

This debate could have meaningful consequences, with the weighting of banks in the $45.7bn $Financial Select Sector SPDR Fund(XLF.US)$, as well as other ETFs such as $11.6bn $Vanguard Financials ETF(VFH.US)$, falling below one-third, from a peak of 45.4 per cent in 2013 according to S&P data, if the proposed changes come into force.

However, the $49bn $The Technology Select Sector SPDR® Fund(XLK.US)$ , the world's largest sector ETF, according to data from TrackInsight, and the $48.2bn $Vanguard Information Technology ETF(VGT.US)$ would become both more cyclical — prone to rise and fall in line with the economy — and more concentrated as the sector is stripped of several stocks, including three of its eight largest.

MSCI and S&P are proposing that "transaction and payment processing companies" are switched from the information technology sector of the GICS framework to the financial sector. This would impact companies such as $Visa(V.US)$, $MasterCard(MA.US)$ and $PayPal(PYPL.US)$, which have a combined market capitalisation of more than $1tn and are, respectively, the fourth, sixth and eighth largest stocks in the IT sector.

This would impact companies such as $Fidelity National Information Services(FIS.US)$, $Broadridge Financial Solutions(BR.US)$ and $Automatic Data Processing(ADP.US)$. The proposed changes would result in heightened concentration in the technology sector, coming as they do on top of a 2018 reshuffle that saw $Meta Platforms(FB.US)$, $Twitter (Delisted)(TWTR.US)$, $Snap Inc(SNAP.US)$and $Alphabet-A(GOOGL.US)$, the parent of Google, transferred to communication services. $Microsoft(MSFT.US)$ and $Apple(AAPL.US)$ already account for a combined 44.7 per cent of the S&P 500 Information Technology index, even before the latest proposals.