In March, what’s inside $200 billion of sector ETFs will be undergoing significant changes, but many advisors and end clients likely will not be aware of the shifts. Some of the largest constituents of the information technology sector ETFs will be moving to the financial sector, while holdings from consumer discretionary funds will be moved into consumer staples-focused products on March 17. The impacted companies include mega-caps MasterCard, Target, and Visa.
In the fourth quarter of 2021, S&P Global and MSCI announced the initial GICS consultation efforts to update the industry framework. While some of the proposed changes to the sector classifications for companies within the S&P 500 Index and other prominent benchmarks are not occurring, many of them have moved forward.
Advisors that own the (SPY ), the (IVV ), and the (VOO ) will not be directly impacted by the changes, but the sector weightings they see when they look at the funds’ websites will be different on the third week of March. According to S&P Dow Jones Indices, the pro forma changes will increase the year-end weightings for the financials sector to 14.4% from 11.7% and boost the industrials and consumer staples sectors to 9.1% and 7.7%, respectively, from 8.7% and 7.2%.
Meanwhile, the 26% and 9.8% stakes for the information technology and consumer discretionary sectors will shrink to 23% and 9.3%.
Significant changes to the sector exposure for the S&P 500 have occurred in the past decade, with the creation of the real estate sector in 2016 and the renaming of the communications services sector and the movement of prominent companies such as Alphabet and Meta Platforms, even though many still call them technology stocks.
This time around, the security-level impact for the largest pure sector ETFs will be notable. The (VGT ) and the (XLK ), which manage a combined $83 billion in assets, have top-10 stakes in MasterCard and Visa, representing approximately 8% of assets, as well as more modest positions in Fiserv, PayPal Holdings, and four others. After March 17, these positions, which collectively recently represented 11% of XLK, will be found in sibling funds the (XLF ) and the (VFH ) along with American Express and Capital One Financial. The weightings of the pending additions were expected to be higher in financial ETFs, as they are not dominated by Apple and Microsoft.
According to analysis from State Street Global Advisors, the pro forma financials sector will have stronger sales and earnings growth, while the pro forma information technology sector will have slower growth.
In addition, the (XLY ) owns shares of Dollar General, Dollar Tree, and Target, recently representing 5% of assets, but these companies will be moving into the (XLP ), joining Walmart and CostCo in a few weeks. A few information technology stocks, including Automatic Data Processing, will become industrials at the same date.
While these moves are likely to occur without triggering capital gains implications, advisors might prefer to limit the impact to favored sectors using ETFs. The (RYT ) and the (RYF ) will soon sell or buy the same stocks as XLK and XLF, but the weightings will differ. For example, MasterCard and Visa each represent just 1% of RYT assets.
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