Moving Day: The Stocks Leaving Tech, Discretionary ETFs For The New Communication Services Sector

Index providers Standard & Poor's and MSCI Inc. announced plans last year to reconfigure the telecommunications sector as communication services, a move that will result in the departure of some well-known companies from some popular consumer discretionary and technology exchange traded funds.

S&P Dow Jones Indices announced Thursday that the Communication Services Select Sector Index is ready to go.

“The select sectors are based on the Global Industry Classification Standard but have different construction rules than the sectors of the S&P 500,” S&P said. 

What Happened

Previously, S&P said the new communications services sector would include “existing telecommunication services companies (as an industry group), but also aim to reflect the integration of telecom, media and select internet companies, leading to an additional industry group called Media & Entertainment.”

The new sector updates the definition of integrated and wireless telecom providers as well as movies and publishing sub-industry groups. Under the media and entertainment umbrella, the new sector makes room for media, entertainment, interactive media and services and interactive home entertainment providers.

Why It's Important

The new communication services sector will result in the departures of some marquee names from ETFs such as the Consumer Discretionary Select Sector SPDR XLY and the Technology Select Sector SPDR XLK.

Top 10 holdings in the Communication Services Select Sector Index will include Facebook Inc. FB, Alphabet Inc. GOOGL, Netflix, Inc. NFLX and Walt Disney Co. DIS. Facebook and Alphabet reside in XLK and other tech ETFs, while Disney and Netflix are currently classified as consumer discretionary names.

“The index has 26 constituents with a total market cap of $2.35 trillion, average market cap of $92.5 billion and median market cap of $34.9 billion as of May 16, 2018,” said S&P.

What's Next

The new communication services index will allocate nearly 53 percent of its weight to stocks that are currently tech sector members, with another 36.4 percent devoted to stocks currently in the consumer discretionary sector. The rest are members of the original telecom sector, including Verizon Communications Inc. VZ and AT&T Co. T.

The index was backtested back to late 2007 through April 30, 2018.

“The Communication Services Select Sector Index returned a cumulative 143.5 percent through May 16, 2018 with annualized performance of 14.2 percent over three years, 12.7 percent over five years and 9.9 percent over 10 years,” said S&P.

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