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Yanking Out Your FANGs: Index Industry Switch Could Reorder ETFs

S&P and MSCI plan to overhaul their industry classifications, merging internet and media stocks with phone companies to replace the telecommunication sector.

By Lu Wang

(Bloomberg) --Watch out, FANG lovers. Some of your favorite stocks are poised to be recategorized, potentially removing them from exchange-traded funds that have held them for years.

S&P Global Inc. and MSCI Inc., two of the world’s biggest index providers, plan to overhaul their industry classifications, merging some internet and media stocks with phone companies into a group called “communication services.” It would replace the existing telecommunication sector.

While the list of affected stocks may not be available until next year, CFRA, an investment research firm, estimates the change could send Google parent Alphabet Inc. and Facebook Inc. out of their current industry slot, technology. Netflix Inc. and Amazon.com Inc. may leave the space known as consumer discretionary, as both fall under the internet & direct marketing retail category. That industry will be combined into the new sector.

 

The shuffling would blend some of this year’s best-performing stocks with the worst. While the FANG bloc has surged 50 percent in 2017, more than triple the S&P 500, phone companies such as AT&T Inc. have dropped almost 20 percent as a group.

It’s the latest effort by S&P and MSCI, which compete in marketing indexes but collaborate on some industry categorization, to match stock-market sectors to the evolving economy. A year after carving out real estate from banks and making it a stand-alone industry, they’re changing again to reflect the expanding role of internet and smartphones in how people communicate.

“It’s a big deal for the fund industry,” said Todd Rosenbluth, director of ETFs and mutual funds research at CFRA. Compared with the real estate spinout, “this is more significant, because it’s impacting more sectors, and the stocks inside these indexes are more widely held.”

Industry Sorting

In theory, the changes affect nothing more than the name of the industry into which equities are sorted in indexes such as the S&P 500. But they matter for passive investors and ETF providers, which base products on the classifications. Even for active fund managers who allocate money based on valuations and earnings, a transfer of the FANG block would influence the attractiveness of various industry ETFs.

According to data compiled by Bloomberg, ETFs that confine themselves to technology, consumer discretionary or communication stocks have about $80 billion in combined assets.

Among the largest sector ETFs, Google and Facebook represent 18 percent of the Technology Select Sector SPDR Fund, while Netflix and Amazon account for one fifth of the Consumer Discretionary Select Sector SPDR Fund. 

When the index providers rearranged bank and real estate stocks, ETF firms used a hodgepodge of strategies to maintain continuity for their customers, including special dividends that worked like spinoffs. That might be harder when companies are being shuffled among multiple industries.

‘Direct Exposure’

It’s “probably not a bad thing, as that’s the whole point of the change,” said Daniel Snover, vice president of Fund Architects in Dallas, which oversees more than $100 million and invests in ETFs. “Our investors would like a little more direct exposure to the internet stocks. It sounds like this change will make that possible.”

MSCI and S&P will also add media stocks to the communications group. Companies likely affected include Comcast Corp. and Walt Disney Co., CFRA said.

“Convergence between telecom and media companies is not just a trend but a fact,” Sebastien Lieblich, managing director and global head of equity solutions research at MSCI, wrote in a statement. The revision “reflects this evolution.”

The changes will be implemented after the close of business on Sept. 28, 2018, with the full list of companies affected to be made available before August.

Bloomberg LP also competes with S&P and MSCI in providing indexes.

 
--With assistance from David Wilson.To contact the reporter on this story: Lu Wang in New York at [email protected] To contact the editors responsible for this story: Arie Shapira at [email protected] Chris Nagi, Eric J. Weiner

TAGS: Technology
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