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Shuffling the stock sector deck

The changes may not mean much for the overall market, but for investors using sector exchange traded or mutual funds, they reorganize their portfolios.
The changes may not mean much for the overall market, but for investors using sector exchange traded or mutual funds, they reorganize their portfolios.

The week ahead for investors promises to include three significant events that have been months in the making.

Two of them you may have heard about; President Donald Trump’s decision to move forward with tariffs on $200 billion worth of Chinese imports and the Federal Reserve’s expected decision to raise its short-term interest rate target to above 2 percent. Both are important moves for investors.

The third event for stock investors is much quieter, yet may represent consequential changes in their portfolios. The S&P 500 changes how it categorizes many of the biggest technology companies beginning Monday. It’s the first big changes for how technology stocks are classified since 1999. The changes are meant to better reflect today’s reality of what these companies do.

It may not sound as important as a trade war or a central bank pronouncement, but rearranging how the most important stock index in the world classifies some of its components will have ripple effects for mutual fund and exchange traded fund investors.

Here’s what is happening: The S&P 500 is getting rid of its Telecoms sector designation and replacing it with a new Communications Services sector. The title is more accurate to how these companies operate in the 21st century. Also, many firms once grouped together in the Information Technology sector, such as Google parent company Alphabet, Facebook and Twitter, join the new communications class.

For years Netflix, Disney, and Comcast were thought of as consumer discretionary companies. The shuffling now puts them in the same communications sector, making it the fifth largest stock sector in the S&P 500 Index. By contrast, the deleted Telecom sector was the smallest.

The changes may not mean much for the overall market, but for investors using sector exchange traded or mutual funds, they reorganize their portfolios.

Tom Hudson hosts “The Sunshine Economy” on WLRN-FM; @HudsonsView.

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