Industry News

A Look at the New Communication Services Sector

The New Communication Services Sector: A Shift from the Stodgy to the Sleek
2 min 59 sec

The Telecommunication Services sector has been shrinking; its share of the S&P 500 Index’s market value is just 2%, down from near 10% in 1989, and now includes only three companies. Telecom companies have been merging with media and internet firms in an attempt to diversify their exposure to the cellphone and internet industries.

Weight of Telecommunication Sector in S&P 500

To reflect these broad changes, the Global Industry Classification Standard (GICS) will undergo its biggest shift ever when the Telecommunication Services sector is revamped into a new Communication Services sector at the end of September to better reflect changing communication methods.

What Changes

The new Communication Services sector will include the existing Telecommunication Services companies (e.g., AT&T, Verizon). It will also include media companies from Consumer Discretionary (e.g., Comcast), select Retail companies within Consumer Discretionary (e.g., Netflix), and Internet Services companies within Information Technology (e.g., Alphabet and Facebook). E-commerce companies such as eBay will move from Information Technology to Consumer Discretionary.

Within the S&P 500 Index, 17 stocks from Consumer Discretionary and seven stocks from Information Technology (IT) are moving to Communication Services. This change takes effect Friday, September 28, 2018, after close of business (ET).

Impact of GICS Changes on S&P 500 Index Sector Weights

According to State Street Global Advisors, this is the biggest shift in sector structure in GICS history, representing:

  • 10% of the S&P 500 Index by market cap
  • 100% of the S&P 500 Telecommunication Services Index
  • 24% of the S&P 500 Consumer Discretionary Index
  • 21% of the S&P 500 Information Technology Index

The change will also affect the performance impact of stocks that remain within the IT sector. As a result of the shift of certain stocks to the Communication sector, stocks that remain in the IT sector will have a greater impact on the sector’s performance, according to S&P Dow Jones Indices. If this change had happened in July 2017, the strong performance of Apple and Microsoft, and their larger share of the IT sector, would have increased the return of the sector to 33.3% for the one year ending July 31, 2018, the index provider calculated, compared to its actual gain of 28.5%.

New Sector’s Market Profile

Filled with high-dividend paying, bond-proxy stocks, the Telecommunication Services sector historically fell under the value style bucket. However, the profile of the new Communication Services sector will be more growth-oriented after the addition of stocks from the Consumer Discretionary and Information Technology sectors.

The new sector will also be more sensitive to the broader equity markets, SSGA research indicates. For the S&P 500 Index, the beta changes from 0.52 for the Telecommunication Services sector to 1.03 for the Communication Services sector. Dividend yield is over 5% for Telecom while less than 2% for Communication. Within the MSCI World Index, the Telecom sector was classified as defensive with a beta of 0.88; the Communication sector will be classified as cyclical with a beta of 0.99.

The Communication Services sector will be the “youngest” of the GICS sectors, measured by the date of the initial public offerings of its constituent companies, according to S&P Dow Jones. Approximately 60% of the sector’s market value will have less than 20 years of return performance data, the index provider notes, making analysis of the sector challenging.

Impact on Investors

Investors with exposure to sector funds may need to reevaluate their allocations. Owners of Technology and Consumer Discretionary index funds could experience taxable events. Passively managed Tech funds will not be able to own three of the five FAANG stocks; Facebook, Netflix, and Alphabet/Google belong to the new Communication Services sector. Active manager sector exposures may shift; overweights to the Tech and Consumer Discretionary sectors may decline while an overweight to Communication may emerge.

Some sector ETF providers started preparing for the changes early. To avoid having to make large trades when the changes go into effect, Vanguard has pegged its Technology, Telecommunication, and Consumer Discretionary sector ETFs to temporary benchmarks, adjusting gradually over four months. And its recently relabeled Communication Services fund already includes small investments in Alphabet and Facebook, according to Reuters.

Callan College banner

Posted by

Share on facebook
Share on twitter
Share on linkedin
Related Posts

A Deeper Look at How We Did With Our Capital Markets Assumptions

Julia Moriarty
An analysis of how Callan's Capital Markets Assumptions performed over time by asset class.

Callan’s 2023 Capital Markets Assumptions: A Behind-the-Scenes Look

Capital Markets Research
This blog post details the process and reasoning behind the Callan Capital Markets Assumptions for 2023-2032, and provides detailed information about ...
Macro Trends

Unprecedented Territory—and the Inherent Limits of Diversification

Jay Kloepfer
Jay Kloepfer discusses the concurrent declines in the equities and fixed income markets at the beginning of 2022.
Macro Trends

Hedge Funds and Ukraine: A Guide for Institutional Investors

Joe McGuane
Joe McGuane analyzes hedge fund performance in 2022 and how managers are handling the volatility stemming from the invasion of Ukraine.

A High-Level Summary of the Callan 2022-2031 Capital Markets Assumptions

Capital Markets Research
This blog post details the process and reasoning behind the Callan Capital Markets Assumptions for 2022-2031, and provides detailed information about ...
Public Markets

Stocks Rebound in 2Q20; Fixed Income Sees More Modest Returns

Kristin Bradbury
U.S. stocks posted double-digit returns, with big gains in global ex-U.S. markets. Treasuries were range-bound during the quarter and most fixed incom...

Main Street vs. Wall Street

Kristin Bradbury
While Wall Street was in celebration mode, much of Main Street continued to suffer. Against the backdrop of stellar asset price performance, rising ca...
Macro Trends

How We Developed Our 2019-2028 Capital Market Projections

John Pirone
Macro Trends

Global Macroeconomic Environment: Is the Glass Half Full or Half Empty?

Kristin Bradbury
Macro Trends

Trade Wars and Other Risks to the Global Economy

Stephen Trousdale
Zanny Minton Beddoes, the editor-in-chief of The Economist, highlighted the “extraordinary dichotomy” between the political realm, full of grim ne...

Callan Family Office

You are now leaving Callan LLC’s website and going to Callan Family Office’s website. Callan Family Office is not affiliated with Callan LLC.  Callan LLC has licensed the Callan® trademark to Callan Family Office for use in providing investment advisory services to ultra-high net worth clients, family foundations, and endowments. Callan Family Office and Callan LLC are independent, unaffiliated investment advisory firms separately registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

Callan LLC is not responsible for the services and content on Callan Family Office’s website. Inclusion of this link does not constitute or imply an endorsement, sponsorship, or recommendation by Callan LLC of their website, or its contents, and Callan LLC is not responsible or liable for your use of it. When visiting their website, you are subject to Callan Family Office’s terms of use and privacy policies.