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Dispatches

Sector Classification Change Could Alter Some ETFs

A shift in sector and industry classifications will impact exchange-traded funds (ETFs) and mutual funds that target telecom industries and sectors.
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A shift in sector and industry classifications will impact exchange-traded funds (ETFs) and mutual funds that target the affected industries and sectors. The change could also result in the renaming of some funds in addition to the potential changes to holdings and the weightings of various stocks within those fund’s portfolios.

Both S&P Dow Jones Indices and MSCI Inc. categorize companies into various sectors and industries based on the Global Industry Classification Standard (GICS). GICS is used to create various indexes upon which ETFs are based and can be used by mutual funds in constructing sector and industry funds. GICS is also used for assessing portfolio allocations. However, it is not the only industry classification system.

The most notable change in the GICS structure is the renaming and expansion of the telecom services sector. This sector will be renamed to communications services sector. Added to it will be advertising, broadcasting, cable and satellite, entertainment, video gaming and internet media companies. As of July 2, 2018, companies scheduled to be included in this shift include, but are not limited to, CBS Corp. (CBS), Comcast Corp. (CMCSA), Electronic Arts Inc. (EA), Netflix Inc. (NFLX) and Walt Disney Co. (DIS).

Providers of telecom services will be classified in the telecom services industry group, which will remain part of the renamed communications services sector.

Several online retailers and marketplace companies currently in the information technology sector will be reclassified into the consumer discretionary sector. Affected companies include, but are not limited to, Alibaba Group Holding Ltd. (BABA) and eBay Inc. (EBAY).

The changes will be effective as of the close of trading on September 28, 2018. Nothing will need to be done by investors, though any change has the potential to cause tax implications. Investors in mutual funds and ETFs tracking broad market indexes such as the S&P 500 index will not be affected.

Investors holding sector and industry ETFs and mutual funds should review their funds’ prospectus, fact sheets and portfolios following the reclassifications for any changes.

Source: “S&P Dow Jones Indices and MSCI Announce Revisions to the Global Industry Classification Standard (GICS) Structure in 2018”; November 15, 2017.

Discussion

George Verghese from NC posted over 7 years ago:

When is AAII going to change the Sector/Industry classification, currently used in Stock Investor Pro 4.5, to the GICS classification system? I know it is difficult and it creates a lot of short-term discontinuities for many of us who have our models built using Stock Investor Pro. But, we have to bite the bullet sometime!! Most Sector/Industry benchmarking services have already changed to GICS. Therefore, it is becoming increasingly more difficult for me to compare the results I get from my Stock Investor Pro based analysis to the results in these benchmarking services.


Wayne A. Thorp from IL posted over 7 years ago:

@George, Thank you for your comments. GICS is a proprietary classification, so we would have to pay to distribute that data. However, the monetary cost of essentially two data points (sector and industry) is significantly higher than the analytical value it provides. We have to weigh to added cost to subscribers against the value-add to the program. Kind regards, Wayne A. Thorp, CFA Stock Investor Pro Program Manager


John D from OH posted over 4 years ago:

George: You could create a watch list in the Portfolio section( a new Portfolio) and place your holdings there that reflect the GICS placement. You can also add a note to your holdings as to which category each is in. When AAII lists it differently you can note both designations. Sometimes the designations don’t match when you look at their market cap status. It is really difficult to look at the diversification chart to tell how specific stocks are classified. Your broker may also classify stocks differently. You could create lists outside of AAII or your broker and categorize them for your own understanding and knowledge.


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