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GICS Sector Reclassification – What this means for Index Funds, ETFS and Mutual Funds

In today’s article, I will steer away from the topics of economics and markets since it is equally important for investor to recognize a significant change in the S&P 500 Index when considering their investment decisions. Specifically, for the second time in two years, the GICS (Global Industry Classification Standard) sectors will change at the end of this month. Effective after the close of September 28, the Telecommunication Services sector will be expanded and renamed Communication Services. This new sector will include companies from both the Consumer Discretionary and Information Technology sectors.

Why is it important?

  • Communication Services will become the fifth-largest sector, while Consumer Discretionary and Technology weights will fall.

  • The changes in weighting will make the sector composition of S&P 500 more balanced. However, the larger companies will make up a larger portion of these sectors.

  • Communication Services will provide an additional investment option for growth-seeking sector investors as the group will see a sharp increase in earnings growth expectations.

  • Earnings growth expectations for Consumer Discretionary and Technology will be lowered slightly given the exit of more growth-heavy stocks.

  • Fundamental Changes:

    • Communication Services will provide lower dividend yield than S&P 500.

    • Communication Services will provide a higher 5-year beta than previously.

    • Communication Services will see an uptick in EBIT margin, lower debt to equity ratio, and lower free cash flow yield.

    • Consumer Discretionary will have a lower EBIT margin and ROE post-GICS changes.

    • Information Technology will have a lower EBIT margin, higher ROE, and higher debt to equity ratio post-GICS changes.

With these changes being implemented, they may have material impact to the current structure of your portfolio. For example, depending on the holdings, it may no longer be as growth focused as it used to be and affect your financial objectives. Or, for retirees, the cash flow generated may be lowered. It is definitely a good time to review your portfolio and I am here to help.

How do you think these changes will impact you? Leave your thoughts below.

 

 


NAI500 - Joseph Tang is an Investment Advisor at BMO Nesbitt Burns and holds the Chartered Financial Analyst (CFA) Designation.

Joseph Tang is an Investment Advisor at BMO Nesbitt Burns and holds the Chartered Financial Analyst (CFA) Designation. He has been working in the financial industry for over a decade. His passion is to provide comprehensive wealth management strategies and build customized investment portfolios for his clients. He firmly believes in fundamental investing and in active management of assets by adapting to constant changing economic conditions. Joseph Tang can be reached through his email address: [email protected] 

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