Issues to Deal with When Stock Market Sectors Are Shuffled

Stock Market Sectors Shuffled?

Shuffling of stock market sectors could cause some volatility as a result of the practical issues involved in realigning holdings.

One of the primary aspects of investing and stock trading is, understanding the various sectors into which the stocks are classified. A change here could significantly affect stock value and perception.

Volatility as a Result of Tech Sector Shakeup

Wall Street may be heading towards some more volatility as a result of Alphabet ($GOOGL) and Facebook ($FB) leaving the tech sector group. The reason for this is the major shakeup about to happen, the largest ever, in the broad business sectors of the stock market. That would cause tech stocks such as Alphabet and Facebook to move to a category containing media and telecom stocks. That’s the reorganization planned for the GICS (Global Industry Classification Standard). An effective date of September 28, 2018 is set, before which funds that track the consumer discretionary, tech and telecom sectors will have to trade stock worth billions of dollars for realigning their holdings.

Some Restlessness Expected

While as much of a fluctuation as witnessed in early 2018 is unlikely, there will be a restlessness since a great deal of money needs to be shifted among the index funds in quite a short time, this Reuters article on Investopedia claims.

  • Vanguard Group, the major fund provider, has already begun an adjustment of its sector ETFs.
  • State Street Global Advisors launches a totally new fund.

Some investors are predicting price swings at trading desks. This could happen if, at the last minute, the huge technology index funds sell Facebook and Alphabet shares that overcome the demand from a few telecom funds that buy the stocks. Net selling is expected by an analyst though it could be a temporary scenario which would present a great buying opportunity for those stocks.

The Impact on the GICS

The GICS is maintained by the MSCI and S&P Dow Jones Indices, and classifies companies through the 11 sectors. The GICS is used by many of the portfolio managers. The newest sector, real estate, was spun off from the “financials” sector in 2018. Now Alphabet ($GOOGL) and Facebook ($FB) will migrate from information technology to the telecommunication services sector, which has been widened in scope, and be classified as “communications services” along with Verizon Communications and AT&T.

Ultimately, these changes are supposed to be reflecting industries that are evolving. Strangely, this “communications services” sector will also include entertainment and video streaming companies Walt Disney ($DIS), Netflix ($NFLX) and Comcast ($CMCSA) along with other consumer discretionary giants.

The Communication Services Sector

A tenth of the S&P 500 is made up of communications services companies, while the telecom sector makes up less than 2%. Now these changes would significantly affect the sector-focused fund investors.

According to Bank of America’s analysis, the proliferation of popular stock such as Alphabet, Facebook and Netflix will make the newly formed communication services sector more overbought than the other sectors.

Another issue caused by the reorganization is that it would get tougher to statistically analyze the investments for each sector. Stats such as valuation multiples and earnings growth will change significantly, including the dividend yield for the telecom sector which would reduce from more than 5% to just 1%.

How to Deal with the Uncertainty

Vanguard Group looks to deal with this projected uncertainty by avoiding the need for making large trades when these changes actually come into effect. It has already hooked its telecommunications, consumer discretionary and technology sector ETFs to provisional benchmarks that gradually adjust over four months. Its Communications Services fund includes small investments in Facebook and Alphabet already.

Being able to go long and short is crucial for successful trading when trading different sectors. As is keeping down fees. TradeZero provides the largest availability of short locates anywhere, in addition to commission free stock trading.

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Tradezero

TradeZero is an online broker dealer that offers commission free trading of the US equity markets, US equity and index options trading. Its clients receive up to 6 to 1 intraday leverage and the ability to trade the US markets without any pattern day trading rules. TradeZero clients have access to a variety of cutting edge trading platforms which include real-time streaming market data.

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