From Facebook To Netflix: The S&P's Big Sector Shakeup, Explained

Standard & Poor's and Morgan Stanley Capital International are reclassifying the companies that constitute the S&P 500 Index for the first time since 1999. What makes the change more interesting is that it shifts the balance of the index. 

The new communication services sector will come into being Friday after the market close, replacing the telecom services sector. 

The MSCI plans to enact the changeover Dec. 3.

For the uninitiated, S&P's Global Industry Classification Standard currently classifies S&P 500 companies into 11 industry groups, with tech, financials, health care, consumer discretionary and industrial sectors among the heavily weighted. The weightings of these sectors are roughly 25.8 percent, 14.7 percent, 13.7 percent, 12.9 percent and 9.9 percent, respectively.

The telecom services sector accounted for only 1.8 percent of the index. 

Company Moves 

The new communication services sector will draw about half of the companies from the tech sector, while the remaining half will comprise media and telecom companies such as Netflix, Inc. NFLX, Comcast Corporation CMCSA, CBS Corporation CBS and AT&T Inc. T.

Tech stalwarts such as Alphabet Inc GOOGL GOOG and Facebook, Inc. FB will defect to communication services. 

Consumer discretionary will now be an Amazon.com, Inc. AMZN-dominant group. The online retail behemoth is likely to account for 35 percent of the group's weighting as opposed to its current 28 percent. 

Apple Inc. AAPL is likely to dominate the tech sector, accounting for roughly one-fifth of the sector's weighting, as Facebook and Google parent Alphabet switch allegiance to S&P's new class. The sector will be dominated by chipmakers, hardware and software companies.

New Kid In Town

The communication services group will have a market capitalization of $2.8 trillion, according to market cap data compiled by Barron's as of Aug. 29. The weightings of major additions to the new group are as follows:

• Alphabet: 31.5 percent
• Facebook: 18.3 percent
• AT&T: 8.4 percent
• Verizon Communications Inc. VZ: 8.1 percent
• Comcast: 6.1 percent
• Disney: 6 percent
• Netflix: 5.8 percent

The FANG group sans Amazon will account for about 55 percent of the new group's weighting, making it top-heavy.

What It Means For Investors 

The communication services sector will now be the fourth-biggest sectoral class after IT, health care and financials.

Investors may soon have to adjust their portfolios to account for the sector changeover, and funds that track the S&P 500 sectors are expected to undergo the most shifts. 

In March, Vanguard said it is creating custom benchmarks for three sector funds — the Vanguard Consumer Discretionary Index Fund, the Vanguard Information Technology Index Fund and the Vanguard Telecommunication Services Index Fund — and their corresponding ETF shares in response to the GICS changes.

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