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Telecom is dead. Long live the new Communications Services Sector

Written By | Jun 22, 2018

WASHINGTON.  Another sea change is taking place in a widely followed stock sector index. The fast-fading Telecommunications Services sector as currently structured by Standard & Poor’s/Dow Jones and MSCI* will get something of a booster shot to reflect current reality. This fall, that index undergoes a transformation, augmented by new stock editions. That’s when it transforms into the broad new Communications Services Sector. (See our earlier article on this topic here.)

We think this new, transformational sector could be a popular idea, practically speaking. There are actually very few traditional telecom stocks left in the full S&P 500 index. Like AT&T, even those are climbing into the entertainment and wi-fi businesses in order to survive, and perhaps even prosper again.

Among other things, this newly revised sector is spawning at least one new ETF. In addition, the move may significantly effect at least one other pair of ETFs.

The actions resulting from this index change will likely prove similar to what took place in 2016. That year, property-owning REITs moved out of the Financials sector to become the new Real Estate sector. This also forced changes to a number of sector ETFs, as they needed to rebalance to reflect the move. (Note: Mortgage and related REITs still remain in the Financials.)




Here’s a portion of the announcement of this latest sector change via a Business Wire report. It includes a related announcement of a new sector ETF, and advises changes that will be made in the portfolios of one pair of existing ETFs. (Italics below via CDN.)

“State Street Global Advisors, the asset management business of State Street Corporation (NYSE [trading symbol]: STT), today announced the launch of the Communication Services Select Sector SPDR Fund (XLC).The fund will provide exposure to the new Communication Services sector, unveiled by S&P Dow Jones Indices and MSCI Inc., following the annual review of the Global Industry Classification Standard (GICS) structure in November 2017.

“The reclassification of the GICS structure will transform the existing Telecommunications Services sector, expanding it to include selected companies from the Information Technology and Consumer Discretionary sectors.It will be renamed Communication Serviceseffective September 21, 2018.

“In addition to the fund launch of XLC, in accordance with the constituent changes under the GICS reclassification for the existing Information Technology and Consumer Discretionary sectors, State Street Global Advisors is announcing that it will rebalance the Technology Select Sector SPDR Fund (XLK) and the Consumer Discretionary Select Sector SPDR Fund (XLY) to reflect the underlying index changes, such changes to be effective after the close on September 21, 2018.

“Existing shareholders of XLK and XLY do not need to take action at this time; however, investors will likely want to analyze their sector positions. “

In other words, affected stocks currently included in the existing IT and Consumer Discretionary sectors will move out of those sectors and into the new Communications Services sector on September 21, 2018.

To clear up any potential misunderstanding, investors should be aware that each sector index is computed by S&P/DOW and MSCI as an index,not an ETF.

New or existing ETFs tracking a given sector will generally include a combination of sector stocks and select financial instruments that attempt to track the underlying sector index. Thus, a sector ETF’s performance can vary to some degree with the official index, an item some investors are not fully aware of.

Please note: The ETFs mentioned in Business Wire are not the only ETFs based on the underlying indexes involved.

In anticipation of the new sector index, XLC, a new Communication Services SPDR ETF opened for trading this past Tuesday. As a new ETF, this one doesn’t boast much trading volume at the moment. That is likely to change as September 21, 2018 approaches.



Based on the current Consumer Discretionary and IT sectors, XLY and XLK will still be based on those sectors as currently constituted. But as September 21 approaches, managers of those sector ETFs containing stocks scheduled to move to the new sector must phase them out of their portfolios. That’s because index-based ETFs must generally track closely to the indexes they represent.

The following bullet items list the most prominent stocks slated to move to the new Communications Services sector. The new XLC ETF already includes them.

  • Facebook (FB)
  • Alphabet C (GOOG)
  • Alphabet A (GOOGL)
  • AT&T (T)
  • Netflix (NFLX)
  • Charter Communications (CHTR)
  • Activision Blizzard (ATVI)
  • Comcast (CMCSA)
  • Walt Disney (DIS)
  • Verizon (VZ)
How we’re approaching the new Communications Services ETF

The three ETFs we’ve focused on are only three of many ETFs that will adjust to this sector shift. Our focus on these ETFs is informational only. Please don’t interpreted our content as a buy or sell recommendation.

However, we may pick up a few shares of the new Communications Services (XLC) ETF as a small speculation issue in our largest portfolio, just to see how this new sector develops.


*Note: MSCI serves as an abbreviation of its original name, Morgan Stanley Capital International.

 

Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17