A close-up of Wall Street's new S&P 500 communication services sector

[September 24, 2018]   By Caroline Valetkevitch

NEW YORK (Reuters) - The new S&P 500 communication services sector, which includes such high-profile names as Facebook <FB.O>, Alphabet <GOOGL.O> and Netflix <NFLX.O>, is set to debut on Monday, as part of the largest-ever overhaul of Wall Street's broad business sectors.

Under the shakeup of the Global Industry Classification Standard (GICS) those stocks and others are being moved out of the technology and consumer discretionary sectors into the new sector, which will be a bulked-up version of the former telecommunications sector <.SPLRCL>.

S&P Dow Jones Indices and MSCI have maintained the widely used industry classification system since 1999, and the reshuffling is meant to reflect how the tech, media and consumer industries have evolved.

The telecom sector, currently about 2 percent of the entire S&P 500, is expected to have a roughly 11 percent weighting under its new communication services tag. Technology <.SPLRCT>, with a roughly 26 percent weighting, is expected to fall to about 20 percent. Consumer discretionary <.SPLRCD> is likely to drop from 13 percent to about 11 percent.

Investors will be watching the biggest U.S.-based technology and consumer discretionary sector exchange-traded funds, Technology Select Sector SPDR Fund <XLK.P> and Consumer Discretionary Select Sector SPDR Fund <XLY.P>, as well as the Communication Services Select Sector SPDR Fund <XLC.P>, which State Street Corp <STT.N> launched in June to track the new sector.

The communication services fund could continue to attract new money in coming weeks as investors seek access to stocks that dropped out of the other indexes, including Facebook and Alphabet, strategists said.

Twitter <TWTR.N> is also moving to the new communication sector, which will include existing telecommunications sector companies: Verizon Communications Inc <VZ.N>, AT&T Inc <T.N> and CenturyLink Inc <CTL.N>.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., September 21, 2018. REUTERS/Brendan McDermid

Apple Inc <AAPL.O> will remain in the S&P information technology index, while Amazon.com <AMZN.O> will stay in the S&P consumer discretionary index.

At 18.7 times forward earnings estimates, the expanded communication services sector carries a higher valuation than the current telecom sector, whose forward P/E is just 10.5 times, according to Thomson Reuters data.

The reworked information technology sector carries a forward P/E of 18.4 times, based on the data. The tech sector's current P/E is 19.5 times.
 

The updated communication sector "will have a growth tilt and shed its current value-only bias," UBS strategists wrote.

While many individual investors will not need to worry about the changes, those who have big allocations to individual stocks and sector-based products may want to make sure their sector exposures are aligned with their investment objectives, said Edmund Tran, equity strategist at UBS Global Wealth Management's Chief Investment Office.

"If, for example, they invested in the telecom sector because they liked the very high dividend yield, which was around five-and-a-half percent, that's going to be drastically lower. So that's not going to be the defensive bond proxy sector that they're accustomed to," he said.

(Reporting by Caroline Valetkevitch; additional reporting by Trevor Hunnicutt; editing by Alden Bentley and Leslie Adler)

[© 2018 Thomson Reuters. All rights reserved.]

Copyright 2018 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.