Index Reshuffle Set To Breakdown FANG Bite
Put this one in your diary for September so that you won’t be alarmed at what could be some outsized movements in two key sub-indices of the S&P 500.
Thanks to the overhaul of the indices measuring the US telecommunications most of the so-called FANG stocks are moving and will be grouped in one index that will attract a lot of money from momentum investors.
The changes are part of the largest-ever shakeup of the stock market’s broad business categories. The changes will impact on holdings and weightings that many Australian international fund managers follow.
All up, 14 S&P 500 companies, including Netflix, will shift from the consumer discretionary sector into communications, joining AT&T, Verizon Communications and CenturyLink in the biggest shakeup of the Global Industry Classification Standard, or GICS, since it was created in 1999. Five S&P 500 companies will switch from technology to communications.
The GICS system of classifying listed companies places them in 11 major sectors and several sub-sectors. It is widely followed by analysts and investors (especially big institutional fund managers).
The current overhaul still being finalised, and will try to reflect the changing nature of the US economy and market (the dropping of General Electric from the 30 stock Dow average last week should be seen in the same context. It was replaced by a smaller company in value in Walgreens, but one that reflected the rise of the consumer facing health services sector).
The telecom services sector will be renamed communications services and supercharged with the addition of Facebook, Netflix and Google-owner Alphabet - three of the five FAANGs, that have driven the stock market to record highs in recent years. (The others are Apple and Amazon, with Microsoft an older tech stock in this group of mega valuation stocks.
The new sector will also include Walt Disney, Comcast (the two Fox bidders) and other entertainment and media rivals and set up (if you think about it) and intra-sector competitive tension with their newer rivals (and the reason for the emerging merger activity) from the likes of Netflix and Alphabet, which produce content and sell it directly to consumers.
Amazon will stay in consumer discretionary and represent nearly a third of that sector which will produce a skewing that could detract from its appeal as a sector.
Over the last five years, the telecommunications sector has had a total return of just 16%, including dividends Dominated by AT&T, Verizon and CenturyLink).
In fact AT&T had a 52% weighting in the index, with Verizon on 44% and CenturyLink way back on 4%. In the new structure Alphabet with have 30%, AT&T 9%, Walt Disney 6%, Nextflix also 7%, Comcast 6%, Facebook 21% Verizon 7% and the remaining stocks a total of 15%.
In its new set up it would have had a total return of 110% and outperformed the S&P 500’s 85% rise, according to Credit Suisse equity strategist Patrick Palfrey.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.