The index S&P 500 will be upgraded later this month in a way that could hesitates the market. S&P Dow Jones Indices and MSCI officially create a new sector of communications services to replace telecoms – the smallest of the 11 index segments.
S&P will complete its reclassification on September 21st. Some companies currently in the technology or consumer products sectors will be moved to the communications group.
As part of the change, the vendors need to rebalance their ETFs while selling shares that are targeting new sectors. Facebook, for example, now represents 5.8% of Technology Select Sector SPDR ETF, which is worth 23 billion USD, but the giant has to move to the new communications services sector.
The Communication Services Select Sector SPDR ETF, which State Street launched last June, includes 18% of Facebook assets. But there are relatively few (500 million USD) assets at the moment. State Street says it believes the ETF will attract more assets after the reclassification is completed as investors will want to avoid problems in their portfolio. But now the ETF has less Facebook shares than the technology ETF have to sell.
State Street funds will lose their balance after the closing of trading on September 21.
While ETF vendors and other investors are reorganizing their assets, it will shake stock prices, although it is unclear what will happen.
“When that happens, there may be some turmoil, depending on how investors rebalance their portfolio”, said Brian Hayes, an analyst at Morgan Stanley.
One of the indicators of how this may affect the market comes from the recent history. Since July, the companies in the technology sector, such as Apple and Microsoft, perform better than those who leave it, such as Facebook and Alphabet, according to Morgan Stanley. Amazon, which remains in the consumer-targeted offer industry, performs better than Netflix, which leaves it.
Many moves are due to other factors, such as Facebook’s disappointing results at the end of July. But as the reclassification approaches, the performance of these shares may be affected by further shocks.