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GICS Sector Changes: Impact on Sector ETFs

After the close on 17 March, S&P Dow Jones and MSCI will reclassify the Global Industry Classification Standard (GICS) structure. This will influence 14 S&P 500 companies. The current GICS structure includes 11 sectors, which will remain unchanged.

The reclassification of firms will occur across five GICS sectors. These are consumer discretionary, consumer staples, financials, industrials, and information technology. The financials and information technology sectors will see the largest impact. UBS estimates financials weight in the S&P 500 will increase by 2.7% and information technology will decline by 3.2%.

Moreover, food, household, and personal care products firms like Target TGT, Dollar General DG and Dollar Tree DLTR will leave the Consumer Discretionary Select Sector SPDR ETF XLY and join the Consumer Staples Select Sector SPDR ETF XLP The new discount stores companies will constitute about 6.5% of the new staples sector, per the UBS article.

Below we describe the likely impact of this reclassification on concerned sector ETFs.

Sector ETFs in Focus

Finance & Information Technology

Financial Select Sector SPDR Fund XLF takes the spotlight.Eight S&P 500 stocks from the data processing & outsourced services subindustry will move to the newly created transaction and payment processing services subindustry in the financials sector.

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The securities include Visa Inc., Mastercard Inc., PayPal Holdings Inc., Fiserv Inc., Fidelity National Information, Global Payments Inc., FleetCor Technologies Inc. and Jack Henry & Associates Inc. Each of the stocks will have larger weightings within their new sector.

Visa V, Mastercard MA, and PayPal PYPL will form roughly 17% of the financials sector, larger than Berkshire Hathaway's weight (currently the largest component), per the article published on UBS.com. Digital payments have been in the front and center of consumer behavior lately.

Apart from showing an increased interest in online shopping, customers are resorting to digital payments to clear their bills. Even, merchants and utility providers are increasingly advocating the same. In the ongoing earnings reporting season, PayPal beat earnings estimate while Mastercard and Visa beat on both lines.

However, the reclassification makes XLF a bit growth-centric. Visa, Mastercard, and PayPal, on average, trade at about a 90% premium to the financials sector on a consensus forward P/E basis. This is a negative for the sector if rates continue to rise.

With pure high-growth technology stocks gaining precedence in the fund, the fund will likely lose its relative value quotient. Rising rate environment will likely prove to be riskier for Technology Select Sector SPDR ETF (XLK).

Consumer

Consumer Staples Select Sector SPDR ETF (XLP) is another sector ETF that deserves definite mention. UBS estimates that the weight of the consumer discretionary sector in the S&P 500 will likely fall by 0.5% and consumer staples will likely gain by 0.5%. Dollar Tree and Target beat on both lines in latest earnings season while Dollar General offered mixed results. UBS indicated that valuation of those discount retailers was at par with consumer staples. Hence, the impact would be minimal. Consumer Discretionary Select Sector SPDR ETF XLY rather now became slightly richly-valued.

Industrials

Automatic Data Processing ADP, Broadridge Financial Solutions BR and Paychex Inc. PAYX come from industry and sectors that have upbeat Zacks ranks. These outsourcing stocks will join Industrial Select Sector SPDR ETF (XLI) with larger weights, post reclassification. The valuation of the sector ETF will go up slightly as ADP and PAYX trade at around 35% premium to XLI.


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Mastercard Incorporated (MA) : Free Stock Analysis Report

Visa Inc. (V) : Free Stock Analysis Report

Broadridge Financial Solutions, Inc. (BR) : Free Stock Analysis Report

Paychex, Inc. (PAYX) : Free Stock Analysis Report

Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report

Target Corporation (TGT) : Free Stock Analysis Report

Dollar General Corporation (DG) : Free Stock Analysis Report

Dollar Tree, Inc. (DLTR) : Free Stock Analysis Report

Financial Select Sector SPDR ETF (XLF): ETF Research Reports

Technology Select Sector SPDR ETF (XLK): ETF Research Reports

Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports

Industrial Select Sector SPDR ETF (XLI): ETF Research Reports

PayPal Holdings, Inc. (PYPL) : Free Stock Analysis Report

Consumer Discretionary Select Sector SPDR ETF (XLY): ETF Research Reports

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Zacks Investment Research