Three of the world's four largest sector-based exchange traded funds face a shake-up due to proposed changes in their composition that would reclassify major companies in information technology indices as financial or industrial.
S&P Dow Jones Indices and MSCI have launched a consultation on a potential revamp of the widely followed Global Industry Classification Standards (GICS) that determine which sector each company is placed in.
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.
“Some of the largest information technology companies in the S&P 500 index could be changing sectors.”
- said Todd Rosenbluth, head of ETF and mutual fund research at CFRA Research.
“At least seven of its large-cap company sector constituents are potentially moving to a new sector,” Rosenbluth added, with the knock-on effect that "banks would no longer dominate broad financial ETFs."
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.
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The technology category would be further denuded by being stripped of its data processing and outsourced services, and payroll processing sub-industry groupings, which would be switched to the industrial sector under the proposals.
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.
MSCI and S&P are currently consulting on the proposals, with a decision due in February.
Source: Financial Times