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Stock Market Sectors - A Major ChangeSubmitted by Townsend Asset Management Corp. on October 5th, 2018
When discussing a particular company, we often talk about the general type of business they are in – financial, health care, technology, etc. The Global Industry Classification Standard (GICS) is commonly used as the classification system for companies, and billions of dollars are invested in index funds that follow the GICS classifications.
GICS divides corporate America into 11 Sectors; 24 Industry Groups; 68 Industries; and 157 Sub-Industries. The 11 Sectors are: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Real Estate, Information Technology, Telecommunications, and Utilities. Sectors provide the broadest way of organizing companies.
There hasn’t been a significant change in the GICS sectors in nearly 20 years – until now. As of the end of September, a number of companies are shifting sectors.
First of all, let’s think about why this is occurring. The economy – and the companies that operate within it, are ever-changing. For example, social media didn’t even exist not that many years ago. In addition, many companies straddle various industries and change their products, services and revenue sources over time, making them somewhat difficult to classify.
In recent years, the Telecommunications sector shrank to just three companies and represented only 2% of the stock market value, while the Technology sector was 26% of the market value.
What are the changes?
• The Telecommunications sector is being renamed the Communications sector. AT&T, Verizon, and CenturyLink remain in the sector.
• 13 companies from the Consumer Discretionary sector are being reclassified into the new Communications sector. (e.g., Netflix, Disney, Twenty-First Century Fox, DISH Network, etc.)
• 6 companies from the Technology sector are also being reclassified into the new Communications sector. (e.g., Google, Facebook, etc.)
With these changes, the Technology sector shrinks from 26% to about 21% of the market, while Consumer Discretionary falls from 13% to 10%, and the rebranded Communications sector increases from 2% to about 10%.
In addition, the characteristics of the sectors are being altered. The Technology sector will now focus more on companies that produce technology rather than companies who use technology. The new Communications sector will be quite concentrated, with Google, Facebook and Netflix accounting for over half the value of the sector.
For investors in sector funds these changes have important trading implications. However, investors with a broadly diversified portfolio might rightly shrug their shoulders and say “so what”? After all, it is just a classification change that doesn’t really impact what a company actually does. But, this is a reminder that for the economy as a whole and the companies within it, change is the only constant.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina. Email: Gerald@AssetMgr.com