S&P Dow Jones Indices and MSCI Inc. announced changes to the Global Industry Classification Standards (GICS) structure that are scheduled to go into effect in March 2023 and involve reclassifying firms across five GICS sectors. While these changes are not as significant as the 2016 and 2018 GICS changes that created new sectors, they will instead trigger industry level changes beneath the surface, as industries are being both eliminated and created.
Investors building and rotating within sector portfolios should be acutely aware of the impact of these changes to the underlying composition of existing market segments across factors and fundamentals.
Key GICS changes include:
Based on proforma classifications published by S&P Dow Jones Indices during the consultation period, the changes will impact the composition of five S&P 500 GICS sectors, with around 3% of the S&P 500 Index market cap to be re-classified at the sector level across 14 stocks, as shown below:
Select List of S&P 500 Companies Potentially to be Reclassified
A select list of impacted large-cap companies will be announced by June 30, 2022, and the full list of names impacted up-and-down the cap spectrum will be available before December 15, 2022.
Given the changes and proforma classifications published by S&P Dow Jones Indices during the consultation period, we constructed a new sector map for the S&P 500 to help investors consider the impact of these changes on S&P 500 sector exposures.
To do this, we re-allocated impacted companies to their new sectors and weighted them by market cap to create the proforma sectors. And as shown below, at a high level, the Tech and Financial sectors were significantly impacted by the reclassification of data processing firms. And although the changes to the other sectors result in a less than 1% change in market cap, they are still noteworthy given the names involved (e.g., Target Corp, Automatic Data Processing) and the nuanced impact at the industry level which we cover in the next sections.
Impacts on S&P 500 Sector Exposures
Information Technology will see the largest reduction in market capitalization among the 11 GICS sectors as a result of the removal of Data Processing & Outsourced Services stocks, which account for around 11% of the Information Technology sector. The change will make the Information Technology sector more concentrated with the weight of its top 10 positions increasing from 70% to 75%.
Some Data Processing & Outsources Services companies, including two of Tech’s current top 10 positions —Visa Inc. and Mastercard Inc — will be re-classified into a newly-created GICS sub-industry: Transaction and Payment Processing Services, under Financials. As a result, Financials will receive the newest names, becoming the second-largest GICS sector in the S&P 500 Index. The Transaction and Payment Processing Services sub-industry will account around 18% of Financials and become the second- largest sub-industry in the sector, trailing the Banks sub-industry.
Other Data Processing & Outsourced Services companies that provide human resource support services, commercial data processing or business outsourcing services — such as Paychex Inc. and Broadridge Financial Solutions Inc. — will move to Industrials, since these business activities are more aligned with business support activities.
While the additions will increase Industrials’ market cap by around $159 billion, they will only slightly increase Industrials’ presence in the S&P 500 Index. But more impactful changes may be at the industry level, as there are currently over 50 firms classified under the existing Data Processing & Outsourced Services Industry in the S&P Total Market Index.1 Some firms moving to Industrials and others going to Financials underscores how nuanced the impacts might be once you leave the S&P 500 and travel further down the cap spectrum or take a finer cut at the industry landscape.
As more brick-and-mortar retailers adopt the omni-channel approach to meet changing customer needs, differentiation between internet & direct marketing and brick-and-mortar retailers has become less prominent. To keep up with the evolving retail landscape, S&P Dow Jones Indices and MSCI Inc. decided to discontinue the Internet & Direct Marketing Retail industry and reclassify companies such as Amazon and eBay into their respective retail industries based on the goods they sell. The Internet & Direct Marketing Retail companies in the S&P 500 will be moved to a newly-created Broadline Retail sub-industry under the same Consumer Discretionary sector. Therefore, there is no impact on the constituents at the sector level.
In addition, retailers such as Target Corp. and Dollar Tree Inc. that generate the majority of their revenue from consumable staple items will be grouped with other hypermarkets and supercenters like Walmart and Costco into a newly created Consumable Merchandise Retail sub-industry under Consumer Staples. The reclassification will increase the market cap of Consumer Staples by $189 billion but barely raise the sector’s weight in the S&P 500 Index.
To understand the impacts on sector fundamentals, we took a bottom-up approach by aggregating stock-level fundamentals based on proforma constituent weight in the new sector. We found the impacts on most sectors’ valuations, growth and quality characteristics, as well as beta sensitivity to key macroeconomic indicators, such as 10-year Treasury yields, are minimal because of either the small weights of reclassified companies or their similarity to the new sector they are moving into.
However, a few changes on sector fundamentals are worth highlighting. Despite losing 11% of its market cap, growth stocks continue to dominate the Tech sector, accounting for 73% of the exposure.2 The sector’s historical revenue growth of its underlying companies and their consensus analyst growth estimates for the next three to five years are little changed, as shown in the chart below.
Changes to Tech’s valuation metrics, including price-to-earnings, price-to-sales and price-to-cash-flow, are also muted, although its price-to-book ratio increases by 6%, as the firms removed have fewer intangible assets than the remaining ones.
Financials and Technology Growth
The Financials sector sees greater allocation to growth stocks based on the Morningstar Style Box classification, resulting in higher historical revenue growth at the sector level.
The current GICS changes are less impactful at the S&P 500 sector level than 2018’s structure changes where companies with greater market cap of the S&P 500 Index changed sector classifications, resulting in significant shifts in sector fundamentals and performance dynamics.
However, these changes to the sector map will result in more nuanced changes at the industry level.
As a leading provider of sector and industry investing solutions, the SPDR Research team will update you once S&P Dow Jones Indices publishes the full list of impacted companies. Stay current by visiting our dedicated sectors webpage.
1 Bloomberg Finance L.P., as of 3/23/2022.
2 Morningstar, as of 3/18/2022.
S&P 500 Index: The version of the popular benchmark for US large-cap equities that includes 500 companies from leading industries and captures about 80% coverage of available market capitalization in the US that reflects returns after reinvestment of dividends.
Global Industry Classification Standards (GICS®): A financial-industry guide for classifying industries that is used by investors around the world. The GICS structure consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries, and Standard & Poor’s (S&P) has categorized all major public companies into the GICS framework.
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