As anyone with a smartphone knows, the lines separating telecom, media, and technology companies blurred a long time ago. S&P Dow Jones Indices is now contemplating changes in the components of the 11 industry sectors that make up the Standard & Poor’s 500 index, the most popular U.S. stock-market benchmark.
“Telecom has totally changed, and the index has to change,” says Howard Silverblatt, S&P Dow Jones Indices’ senior index analyst.
The implications for investors could be significant. Reassigning companies to different sectors would affect the holdings of the sector-specific exchange-traded funds that track the index—and actively managed funds whose managers strive to hew closely to the S&P 500’s sector weightings. Even managers free from benchmark restraints can’t ignore the changes.
“There are going to be a lot of managers who have to change their portfolios, depending on the new sector divisions,” says Michael Lippert, a portfolio manager at Baron Capital.
The S&P telecom sector, once home to 14 companies, now holds only four: Verizon Communications (ticker: VZ), AT&T (T), CenturyLink (CTL), and Level 3 Communications (LVLT). The last two announced a merger last year and are awaiting regulatory approval.
S&P Dow Jones and MSCI, the other prominent equity-index creator, announced in July that they are seeking investor commentary about proposed changes to the telecom sector—including renaming it “communications services” and expanding it to include three industry groups: telecommunication services, media and entertainment, and consumer internet and digital services.
The language of the S&P/MSCI proposal cites the inclusion of social-media and search-engine companies in the reconfigured sector, which strongly suggests that Facebook (FB) and Alphabet (GOOGL)—currently components of the information-technology sector—are prime candidates for reassignment.
Other companies that might be moved from their current homes into communications services include Alibaba Group Holding (BABA) and Netflix (NFLX), from the tech and consumer-discretionary sectors, respectively.
S&P Dow Jones plans to make its next announcement in November, although implementation probably won’t occur this year. The creation of a new classification for real-estate-related stocks, implemented in 2016, took nearly two years.
IRONICALLY, A REASSIGNMENT of Facebook and Google parent Alphabet could result in the de-FANGing of the information-technology sector. The two are half of a quartet of highflying tech stocks whose other members include Netflix and Amazon.com (AMZN), also a consumer-discretionary component.
Booting Facebook and Alphabet from tech would impact ETFs such as Technology Select Sector SPDR (XLK), Vanguard Information Technology (VGT), and Fidelity MSCI Information Technology Index (FTEC), which would have to sell the stocks, notes Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA. “Any changes could have big implications for sector ETFs offered by iShares, Vanguard, State Street Global Advisors, Guggenheim, Fidelity, and others,” he says.
BlackRock, which owns the iShares franchise, declined to comment on possible changes, while a spokesman for State Street, sponsor of the SPDR ETFs, said the company “plans to participate in the upcoming consultation process.”
Brian Wieser, of Pivotal Research, argues that Facebook and Google have more in common with media owners than tech stocks because they all compete for ad sales and consumer attention. He argues that stocks such as Nielsen Holdings (NLSN), Adobe Systems (ADBE), and Salesforce.com (CRM) also belong in the new communications-services sector, as they are more like ad and media businesses than their current sector cohorts.
The creation of an expanded communications-services sector would also alter the sector weightings of the S&P 500, affecting actively managed funds whose portfolios closely mirror the index. Telecom services accounts for 1.9% of the index; consumer discretionary, 11.8%; and tech, 23.7%.