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In One Chart - October 3, 2018

In One Chart: FB Drags New Comm Services Sector

The new S&P 500 Sector, dubbed “Communication Services”, officially launched on September 28th. But the Communication Services Select Sector SPDR® ETF (XLC), which tracks the S&P 500 sector, has been live since June 18th.

Communication Services is the new GICS Sector Classification that is replacing S&P’s old Telecommunication Services. It is considerably larger than its predecessor and includes household names like Facebook (FB) and Google (GOOG), formerly of Information Technology, and Disney (DIS) and Netflix (NFLX), moving over from Consumer Discretionary.

As a result of the change, Technology’s relative weight of the S&P 500 will get a haircut. Additionally, any sector-tracking ETFs aligned to the S&P 500’s former Telecommunication Services, Information Technology, and Consumer Discretionary, will see a composition shake up.

Perhaps most notably, Facebook’s recent struggles won’t be incorporated into the Technology sector or ETFs that track it. For example, the Tech Select Sector SPDR® ETF (XLK), is newly insulated. Instead, XLC, of which Facebook comprises 17.5%, gets dragged down.

See Facebook’s impact on XLK and XLC in the chart below.

In the lower section of the chart above, you can see that XLC’s correlation with Facebook has increased, while XLK’s correlation has decreased significantly over the last month, highlighting the impact of the sector shuffle.

In fact, XLK has been climbing as Apple (AAPL) and Microsoft (MSFT) now combine for more than 37% of the ETF’s weight.

According to S&P, the change better aligns the sector classifications with modern means of communication and entertainment — an integration of telecom, media, and internet seen more in recent years.

If you hold or are considering holding a security that tracks any of the S&P’s sectors, it’s important to evaluate performance over the coming months to stay informed of this reorganization’s impact.

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