Index Changes Help ETF Avoid Facebook Hit -- WSJ

By Asjylyn Loder

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 (August 2, 2018).

The Vanguard Information Technology exchange-traded fund has been steadily selling shares of Facebook Inc. to prepare for next month's reclassification of technology stocks. As a result, the $21.4 billion ETF has sold 3.8 million Facebook shares since April, more than half of its holdings, according to FactSet, thereby avoiding a sizable slice of Facebook's 21% tumble since July 25.

The lucky break stems from upcoming changes to a global system for sorting companies by industry, which will affect sector-focused index funds as well as actively managed funds that limit how much stock they buy in different sectors. MSCI Inc. and S&P Global Inc., which developed the classification system, are redefining hundreds of companies, including giants like Facebook, Comcast Corp. and Google parent Alphabet Inc.

"This is a pretty meaningful change that people should be paying attention to," said Rich Powers, head of ETF product management for Vanguard.

Next month, Facebook, Alphabet and Twitter Inc. will move from "information technology" to the newly dubbed "communications services" sector. The sector will also include Walt Disney Co., Netflix Inc. and Comcast, which are being moved out of "consumer discretionary."

Vanguard chose to slowly shift investments in three of its ETFs in the months leading up to the September rebalance, including its technology ETF, consumer discretionary fund and telecommunications services fund. The process is similar to what Vanguard has done with past index changes, such as the spinoff of real estate from the financial sector.

"They have historically tried to reduce the impact of the ripping-off-the-bandaid approach," said Todd Rosenbluth, head of fund research for CFRA.

As a result of Vanguard's approach, Facebook accounts for less than 3% of the Vanguard Information Technology ETF's assets, compared with 6.3% of State Street Corp.'s $22.6 billion Technology Select Sector SPDR.

State Street plans to rebalance its affected funds in September and last month launched an ETF pegged to the newly-redefined communications services sector. This allows investors to remain in line with the existing index and make their own decisions about how to position their portfolios for next month's change, said Matt Bartolini, head of SPDR Americas research at State Street.

State Street's new Communications Services Select Sector SPDR ETF, which has already picked up $362 million in assets, has 18% of its portfolio invested in Facebook stock.

Write to Asjylyn Loder at asjylyn.loder@wsj.com

(END) Dow Jones Newswires

August 02, 2018 02:47 ET (06:47 GMT)

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