GICS Sector Changes Likely to Impact ETF Holdings

Key Takeaways

• On March 31, 2022, S&P and MSCI announced proposed changes to the GICS industry framework. This is likely to impact the constituents of a few large sector and industry ETFs that replicate indices based on the GICS framework.
• After reviewing the announcement, a preliminary analysis indicates that a few large retailers like Target, Dollar Tree, and Dollar General will be dropped from some Consumer Discretionary sector ETFs, like the Consumer Discretionary Select Sector SPDR Fund and included in some Consumer Staples sector ETFs, like the Consumer Staples Select Sector SPDR Fund. However, it is likely that the SPDR S&P Retail ETF, the largest retail industry specific ETF, will not be significantly impacted in its constituent holdings, since it already holds retailers across both the consumer discretionary and staples sectors.
• We anticipate that major payment processing firms like Visa, Mastercard, and PayPal will be dropped from some large Information Technology sector ETFs, like the Technology Select Sector SPDR Fund and instead be included in some Financial Sector ETFs, like the Financial Select Sector SPDR Fund. In addition, a few more names may potentially be added to the SPDR S&P Regional Banking ETF from companies that were previously classified under the thrifts and mortgage finance sub-industry.
• Investors will benefit from understanding these changes since it may impact the exposure in their sector-focused ETF holdings. However, these changes will only go into effect in March 2023, so investors have time to analyze the ETF implications and rebalance their portfolios accordingly, if required.

GICS and its Impact on ETFs

Sector classification methodologies, such as the Global Industry Classification Framework (GICS), play an important role in determining how stocks get classified in sector and industry ETFs. There are several industry frameworks used in the ETF industry, but GICS continues to be the dominant framework. Therefore, the way GICS classifies stocks is extremely relevant to ETF investors. As an example, GICS classifies Amazon as a Consumer Discretionary stock rather than as an Information Technology stock. Consequently, any sector ETFs based on the GICS framework will include Amazon in their Consumer Discretionary ETFs rather than their Technology ETFs.

Figure 1: Current GICS structure prior to the new announcement

Proposed Changes to GICS

On March 31, 2022, S&P and MSCI announced proposed changes to the GICS industry framework as part of their annual review. These changes appear to be less significant than some previous announcements. In the past, some GICS changes have created very fundamental shifts in sector definitions. For example, in 2018, the Telecommunications Services sector was renamed to Communication Services and expanded to include mega cap stocks like Alphabet, Facebook (now called Meta), Netflix, and Comcast, which were earlier classified either under Technology or Consumer Discretionary.

Some of the most significant changes proposed in the March 31, 2022, announcement include:

1. The discontinuation of the Internet & Direct Marketing Retail industry within the Consumer Discretionary Sector. This reflects the blurring of lines between in store and online retail since many retailers have become multi-channel. Stocks in this industry will either be moved to a new industry called Broadline Retail or to an entirely different sector (Consumer Staples) based on the nature of goods sold by them.
2. The transfer of the data processing & outsourced services sub-industry from the IT Sector to the Industrials Sector. However, transaction and payment processing firms in this sub-industry are being moved to the Financials Sector, while travel data processing firms are being moved to the Consumer Discretionary Sector.
3. The discontinuation of the thrifts and mortgage sub-industry in the Financials Sector, with the thrift/savings banks from the sub-industry being moved to the regional banks sub-industry and the mortgage companies being moved to a new commercial and residential mortgage finance sub-industry.
4. The creation of a new industry group called Real Estate Management and Development within the Real Estate Sector. Additionally, new specialized industries and sub-industries will be created under the REIT industry group to reflect the growth and increased specialization in the REIT sector.

Table 1 summarizes these changes and the resultant re-classification implications.

Table 1: Summary of March 2022 GICS impacting classification of stocks

Source: CFRA’s ETF Database; As of March 31, 2022.

Notes: This table focuses on the key changes impacting sector allocations and is not intended to comprehensively summarize all the changes in the March 31, 2022, GICS announcement.

Sector and Industry ETF Families that Follow GICS

Sector and industry ETFs in aggregate accounted for $725 billion in total assets in the U.S. as of March 31, 2022. However, not all sector ETFs are based on the GICS framework, and additionally, not all sectors are impacted by these changes (e.g., sectors such as Materials or Energy are not impacted).

To analyze the impact of the recent announcement on ETF investors, it important to understand which sector and industry ETFs in the U.S. follow the GICS framework. Table 2 summarizes the most important sector and industry ETF ‘families’ in the U.S. The three largest families all follow GICS and therefore will be impacted by the recent announcement. However, Blackrock’s U.S.-focused sector ETFs, which also have substantial assets, will not be impacted since they follow indices that are not GICS based. Their global sector ETFs will be impacted since that ETF family tracks S&P indices that are GICS based.

Table 2: Largest Sector and Industry ETF ‘families’ in the U.S.

Source: CFRA’s ETF Database; As of March 31, 2022.

Specific Stocks and ETFs Impacted

The constituent holdings of a few large sector ETFs will be selectively impacted by the announced GICS changes. Table 3 summarizes a few of the largest stocks and ETFs that will be affected and is not intended to be a comprehensive list of all impacted tickers. These are preliminary projections based on the announcements published by S&P and MSCI. The specific names could change between now and when the index constituent changes are officially announced in December 2022.

Table 3: Select stocks and ETFs impacted by GICS announcement on March 31, 2022: Preliminary projection

Source: CFRA’s ETF Database; As of March 31, 2022.

• The decision to move some consumable merchandise sellers to the Consumer Staples Sector will result in stocks like Target, Dollar Store, and Dollar General being dropped from a few large Consumer Discretionary ETFs and instead being held in Consumer Staples ETFs. Importantly, the largest retail ETF (XRT) seems unlikely to be impacted since it already holds retailers across both the Consumer Discretionary and Consumer Staples sectors.
• Payment processing firms like Visa, Mastercard, and PayPal will be dropped from some Information Technology sector ETFs (like XLK) and instead be included in some Financial Sector ETFs (like XLF).
• There may be new stocks added to the SPDR S&P Regional Banking ETF (KRE) from the erstwhile thrifts & mortgage finance sub-industry. Other regional bank ETFs, like the Invesco KBW Regional Banking ETF (KBWR) and iShares US Regional Banks ETF (IAT) are unlikely to impacted since they do not follow GICS.

Conclusion

Although not as significant as some past GICS changes, the March 2022 announcement of proposed GICS shifts is still meaningful for ETF investors. A few large retailers like Target will move from those Consumer Discretionary ETFs to Consumer Staples ETFs that follow GICS. Further, payment processing firms will likely transition from the IT sector ETFs to Financial sector ETFs that follow GICS. These changes will only be effective in March 2023, giving investor sufficient time to analyze the impact on their exposure and rebalance accordingly, if required.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.