By Danielle Chemtob
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 2, 2018).
The technology sector's dominance of the stock market is about
to face a big test.
Facebook Inc. and Google parent Alphabet Inc. are expected to
say goodbye in September to the highflying tech sector of the
S&P 500. They will join a new communications-services group
that will also house media giants such as Netflix Inc. and Comcast
Corp. that now reside in the consumer-discretionary group.
This is far more than mere housekeeping on the part of an index
provider. The revisions mean that funds tracking the current
telecom, tech and consumer-discretionary sectors will be forced to
trade billions of dollars of shares to realign their holdings
before the moves become effective Sept. 28.
The new sector's weighting in the broad S&P 500 will be more
than 10%, up from less than 2% for the current telecom sector,
according to a report from Credit Suisse. Some investors expect a
pickup in volatility -- and price swings -- when the changes take
effect as tech-focused funds drop Facebook and Alphabet.
"It's almost like a philosophical question," said Jonathan
Golub, chief U.S. equity strategist at Credit Suisse. "If we group
companies differently, does that change the behavior of
investors?"
The answer: most likely. Mr. Golub said he expects there will be
"arbitrage opportunities" for traders and investors who are able to
take advantage of any volatility.
Here's what is happening: S&P Dow Jones Indices and MSCI
Inc. are restructuring the current telecommunications sector in the
S&P 500, which houses only three stocks: AT&T Inc., Verizon
Communications Inc. and CenturyLink Inc. The sector's influence on
the broader S&P 500 has waned over the years because of
consolidation in the industry. So the sector can swing wildly when
the stock price of just one company in the group moves.
Those issues should be addressed by the index providers' plan to
broaden the sector to include companies that focus on communication
and offer content and information. They are scheduled Monday to
unveil the full list of companies subject to the restructuring,
having in January already named some of the big companies affected
by the changes.
Already, some of the big fund companies are trying to limit the
upheaval in the markets by setting up new funds that track the
proposed communications sector ahead of its launch. So far,
investors have been slow to take advantage.
State Street Corp.'s new Communication Services Select Sector
SPDR began trading June 19, but just $135.8 million has flowed into
it as of Friday, according to FactSet. That is less than the amount
that flowed into State Street's technology sector fund on June 19
alone.
Vanguard's Communication Services Fund, a transition benchmark
that began tracking the companies proposed for the new sector in
March, has seen minimal fund flow since the announcement, according
to FactSet.
"Because you're bringing in some names with much larger market
caps for that index and names that are very top of mind...it
wouldn't surprise us that investors would at least take a closer
look," said Rich Powers, head of ETF product management at
Vanguard.
The changes create big opportunities for growth investors who
have long shied away from telecom companies, which are considered
value plays for their steady dividend payments.
Chris Cook, president and CEO of investment adviser Beacon
Capital Management, said he nearly pulled his clients' assets out
of Vanguard's telecom exchange-traded fund earlier this year
because the firm was facing liquidity issues when trying to trade
large blocks of shares. Beacon manages $3 billion in assets, the
vast majority in ETFs tracking the 11 S&P 500 sectors.
"It wasn't a diversified sector, and that's why we buy ETFs and
invest at the sector level," he said.
The proposed communication-services sector would have
outperformed the S&P 500 since 2013 and would have gained 6.9%
this year through June 15, compared with the S&P 500's 4% gain
through that date, according to Credit Suisse. The current
telecommunications sector, meanwhile, has underperformed this year,
suffering the biggest losses of all 11 sectors in the index with an
11% decline through Friday.
For those investors who want to make a blanket investment in
growth companies, the technology sector may no longer be the best
bet. The new consumer-discretionary sector will have the highest
share of growth companies, followed by communication services,
according to projections from State Street that were based on the
initial list of companies affected. The makeup of the technology
sector, considered the darling of growth investors, will fall to
49% growth from 61%.
Meanwhile, investors who favor telecom stocks for their
dividends and use passive funds that track the sector as a way to
hedge against risk will also need to make changes. The new sector
is expected to yield just 1.2%, according to Credit Suisse,
compared with the current 5.6% yield of the telecom sector, which
is the highest of any of the 11 S&P 500 sectors.
"The guy that may hold [a telecommunications fund] may be an
individual who is risk averse and who likes yields," Mr. Golub of
Credit Suisse said. "He may wake up and the weights of AT&T and
Verizon in that mutual fund are going to be much smaller, and he's
going to end up with a bunch of Netflix and Google and Facebook.
And he may be saying, 'Wait a second this isn't what I thought I
had.'"
(END) Dow Jones Newswires
July 02, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
Alphabet (NASDAQ:GOOG)
Historical Stock Chart
From Feb 2024 to Mar 2024
Alphabet (NASDAQ:GOOG)
Historical Stock Chart
From Mar 2023 to Mar 2024