Big changes are coming concerning the way in which the S&P 500 classifies tech companies, as regulators recognize that the changing face of technology has altered how they view some of these businesses and has brought about the need to organize them into new sectors.
Together, the Modern Index Strategy Indexes (MSCI) and Standard and Poor (S&P) have developed a new addition to the Global Industry Classification Standard (GICS), which marks the first reclassification of tech companies since 1999.
The change will affect the major technology companies listed on the S&P 500 from 28 September, when the newly announced Communications Services sector will replace the current Telecoms class. The new sector will include tech communications giants such as Facebook and Netflix.
This reclassification recognizes how telecoms, media and internet-based industries have slowly merged and consolidated, forming businesses that take on many aspects of each industry.
The news could have a massive impact on some investors in terms of the way that they trade and may particularly alter the handling of exchange-traded funds (ETFs). Trading companies are already implementing changes ahead of the new format’s introduction in six weeks’ time.
With the Telecoms sector’s removal, the new Communications Services classification is set to incorporate a wider range of companies that better fit the nature of today’s world and the ways that users access most services. As so many services are accessible on the go, and phones are no longer latched onto long cables, telecoms as a whole no longer reflect a significant representation of how people interact.
The S&P 500 will also reclassify some companies in the Consumer Discretionary sector into the Communications Services sector. These stocks currently reside in the sub-industries of Internet and Direct Marketing Retail as well as Media. Some companies will also move from the Information Technology classification into the new sector.
According to Wells Fargo, the Communications Services sector will carry serious weight on the S&P 500, as introducing both Netflix and Facebook into the new classification increases the volume of top-end companies. The new sector will represent 10% of the total stock exchange, encompassing the largest area of trading.
The introduction of the Communications Services sector should resolve the issue of classifying large enterprises with many different sides and trying to fit them into the box that suits them best. Apple is set to remain in both the Technology and Communications Equipment sectors, which makes sense considering most of its output. However, its ventures into music streaming services may stand out.
Network giant Verizon has recently acquired a new media asset with Oath, and there are queries as to whether it is still merely a telecoms business.
The changes to the GICS offer the best reflection of which sector each company currently produces the biggest revenue from, and according to the Chairman of the Index Committee at S&P Dow Jones Indices, David Blitzer, the new sector introduction is born from a need to “acknowledge this convergence”.
ETFs that run on tracking specific sectors will need new benchmarks, but for most investors, little worry or change will be necessary. These investment funds routinely shake up their offerings to better reflect the current market.