Alterations to the Global Industry Classification Standard (GICS®) structure will be revealed in mid-March and while this particular event isn’t something advisors need to obsess over, it is one worth monitoring, particularly for those advisors that deploy sector funds in client portfolios.
It’s possible that the GICS changes will somewhat mitigate some of the concentration risk currently seen in the S&P 500. While off the highs seen entering 2022, technology still accounts for a whopping 26.62% of the index, or nearly 1,200 basis points more than healthcare – the second-largest sector weight in the index.
In fact, S&P Dow Jones Indices is forecasting that the S&P 500’s allocations to technology and consumer discretionary stocks will decline while exposure to the financial services and industrial sectors will increase.
Beyond sector-level changes, advisors should also expect alterations to industry and sub-industry groups, which will likely affect hundreds of exchange traded funds and index funds. Here are some to stay up-to-date on.
Big Consumer Sector Changes Coming
As noted above, the S&P 500’s weight to consumer cyclical stocks, 10.38% as of Jan. 27, is poised to decline.
“A key update in March 2023 is that retailers will be classified based on the nature of goods sold rather than according to the underlying technology used to deliver the product or service. This update reflects the fact that retailers have increasingly taken an omni-channel approach to sell their products, reducing the demarcation between existing segments,” notes S&P Dow Jones Indices.
While the Internet & Direct Marketing Retail sub-industry group is being eliminated, Amazon (NASDAQ:AMZN), the largest consumer discretionary stock, will remain in that sector. On the other hand, the sector could lose some big names, likely Target (NYSE:TGT), to the consumer staples sector.
“Retailers that generate a majority of revenue or earnings from staples such as food, household and personal care products will be migrated to Consumer Staples,” adds S&P Dow Jones.
Talking Tech Changes
Many clients and perhaps some advisors probably think of Visa (NYSE:V) and Mastercard (NYSE:MA) as financial services companies, but the fact of the matter is those two stocks currently combine for almost 8% of the S&P Information Technology Index.
That will be short-lived as the aforementioned GICS changes will result in those companies moving to the financial services sector. My educated guess – emphasis on this being my speculation, not confirmation from index providers – is that PayPal (NASDAQ:PYPL) and perhaps several other members of the S&P Information Technology Index will also move to the financial services sector, giving a value sector more of a growth feel.
“Information Technology will also be affected by the upcoming changes: the Data Processing & Outsourced Services sub-industry is being discontinued to reflect the close alignment with business support activities in other sectors. Companies in the sub-industry will migrate to: Industrials under a definition update or under Human Resources & Employment Services; to Financials under Transaction and Payment Processing; or to Consumer Discretionary under Hotels, Resorts & Cruise Line,” notes S&P Dow Jones.
For now, it appears as though material alterations to the energy, materials and utilities sectors will be limited or won’t occur at all.