The Global Industry Classification Standard (GICS) changes on March 17, 2023 reflect shifts in business demands and consumer behaviour. The changes will have only a small impact on indices but will provide investors with more granular information about the underlying business operations of companies. The affected sectors include information technology, industrials, financials, consumer discretionary, consumer staples and real estate.
These changes are scheduled to go into effect for S&P indices after the close of trading on March 17, 2023 and for MSCI indices after the close of trading on May 31, 2023.
If you are building and rotating sector portfolios, it’s important to know that these GICS changes will alter the composition of existing market segments across factors and fundamentals by:
Based on the full list of impacted companies’ new classifications published by S&P Dow Jones Indices in December 2022, 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:
Figure 1 List of S&P 500 Companies to Be Reclassified
Figure 2 Impacts on S&P 500 Sector Exposures
The Global Industry Classification Standard (GICS) is a taxonomy used to classify and organise companies into different industry groups and sub-industries based on their primary business activities. GICS was jointly developed by S&P Dow Jones Indices and MSCI Inc. in 1999 and is widely used as a way to compare companies within the same industry and to track the performance of sectors.
Every company is assigned a GICS code based on its primary business activities, which enables investors to evaluate the company’s performance against other companies within the same industry or sub-industry. These sub-industries are rolled up into 11 sectors (see Figure 3). GICS is reviewed annually to ensure it continues to reflect global equity markets and changes in the economy.
The changes in March 2023 are notable but are less impactful than the moves in September 2018, when the communication services sector was launched. This time around, the likely impact on valuations, growth and quality characteristics, and beta sensitivity to key macroeconomic indicators, is relatively small.
Figure 3 Global Information Classification System
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 12% 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 68% to 72%.
Some Data Processing and 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 most new names. The Transaction and Payment Processing Services sub-industry will account around 19% of Financials and become the second-largest sub-industry in the sector, trailing the Diversified 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 US$153 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 55 firms classified under the existing Data Processing & Outsourced Services industry will be reclassified to Financials or Industrials based on the list published by the S&P Dow Jones Indices underscoring 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 US$153 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 12% of its market cap, growth stocks continue to dominate the Tech sector, accounting for 74% of the exposure.1 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, price-to-cash-flow and price-to-book ratios are also muted.
For a full list of stocks affected in S&P and MSCI indices, please reach out to your local SPDR salesperson.
1 Morningstar, as of December 27, 2022.
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.
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.
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