fund

What will be the impact of significant tech reclassifications for investors?


The new sector was launched on 24 September

The new sector was launched on 24 September

The reclassification of some of the S&P’s largest technology stocks, shifting companies like Facebook, Netflix and Google’s Alphabet to the newly created communication services group, could lead to up to $100bn of turnover between the sectors, as quant and ETF products are forced to rebalance.

Meanwhile, providers are also taking advantage of the changes with a spate of new product launches.

Last week, index providers MSCI and S&P made their first significant changes to sector definitions since 1999, scrapping the existing telecoms sector, which had dipped to under 2% of the S&P 500, making way for the communication services grouping, which will house 26 companies.

Effective from 24 September, the sector has been established for companies providing platforms for communication, and those that operate various kinds of media.

It also includes consumer discretionary sector companies within the media and internet & direct marketing retail sub-industries.

As a result, the information technology sector has shrunk from around 26% of the index to approximately 20%, while communication services and consumer discretionary are around 10% each (see chart, below).

The value of rebalancing sector-tracking and some thematic ETFs could now run into tens of billions of dollars following the changes, according to SPDR estimates. 

Quant rebalance

Meanwhile, in JP Morgan’s recent Equity Strategy and Quantitative Research report, analysts warned the technology and consumer discretionary sectors may experience outflows as a result of the reclassification as quant funds rebalance portfolios.

The report explained quant strategies use factors like value, growth, momentum and volatility to rank stocks’ attractiveness and if, for example, a relatively expensive stock moves from a cheap sector to an expensive sector, its value rank will improve if it no longer appears overvalued relative to its new peers.

“Consequently, sector reclassification on its own can trigger significant rebalancing in quant portfolios even if the stocks’ fundamentals are unchanged,” it added.

It also warned there would be “incremental” inflows and outflows as a result of the reclassification.

“We estimate two-way turnover linked to the reclassification to be ~$100bn. Additionally, the already reduced new tech and discretionary sectors may experience further outflows from quant rebalancing.”

The report highlighted constrained investors, such as some pension funds, which do not invest in single stocks, that want exposure to growth without committing to individual names, are likely to rebalance into the new communication services sector.

“While IT is still the largest sector by market cap, communication services coming in as the fifth largest sector in the index could benefit from growth-related flows.”

GICS rebooted: How S&P 500 sectors are changing



READ SOURCE

Leave a Reply

This website uses cookies. By continuing to use this site, you accept our use of cookies.