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Wall Street's S&P communication sector starts with a whimper

Stock MarketsSep 24, 2018 10:49AM ET
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© Reuters. FILE PHOTO: FILE PHOTO: The AT&T logo is seen on a monitor on the NYSE floor.

By Caroline Valetkevitch

NEW YORK (Reuters) - The new S&P 500 communication services sector (SPLRCL), which includes such high-profile names as Facebook (O:FB), Alphabet (O:GOOGL) and Netflix (O:NFLX), made its debut on Monday, after the largest-ever overhaul of Wall Street's broad business sectors.

Under the shakeup of the Global Industry Classification Standard (GICS), those stocks and others were moved out of the technology and consumer discretionary sectors into the new group - a bulked-up version of the former telecommunications sector (SPLRCL).

The reshuffle appeared to happen without any disruptions after investors reorganized their positions at the end of trading on Friday, which was the highest-volume trading session since Feb. 9, according to Thomson Reuters data. A big chunk of the volume came in the last 15 minutes of the session.

"It's testament to the strength and transparency of U.S. equity markets that it was smooth as silk, that you can take all these stocks and reclassify them into a new sector and not disrupt trading," said Michael Antonelli, managing director, institutional sales trading at Robert W. Baird in Milwaukee.

"It was like somebody repainted a bedroom overnight. It went from blue to purple with no disruption."

The communications sector was last down 0.4 percent, compared with a 0.4 percent drop for the broader S&P 500 (SPX).

The sector's biggest gainer was Netflix Inc (O:NFLX), up 2.0 percent and its biggest loser was Comcast Corp (O:CMCSA), which fell 7.4 percent after news it beat Rupert Murdoch's Twenty-First Century Fox (O:FOXA) in the battle to buy Sky (L:SKYB) on Saturday.

The biggest U.S.-based technology and consumer discretionary sector exchange-traded funds, Technology Select Sector SPDR Fund (P:XLK) and Consumer Discretionary Select Sector SPDR Fund (P:XLY), as well as the Communication Services Select Sector SPDR Fund (P:XLC), which State Street Corp (N:STT) launched in June to track the new sector.

S&P Dow Jones Indices and MSCI have maintained the widely used industry classification system since 1999, and the reshuffling is meant to reflect how the tech, media and consumer industries have evolved.

Replacing the telecom sector, about 2 percent of the entire S&P 500, the communications index was expected to have a roughly 11 percent weighting under its new communication services tag.

The weighting of the technology index (SPLRCT), was expected to have fallen to 20 percent, from 26 percent, while consumer discretionary (SPLRCD) is likely to drop from 13 percent to about 11 percent.

The communication services fund could continue to attract new money in coming weeks as investors seek access to stocks that dropped out of the other indexes, including Facebook and Alphabet, strategists said.

Twitter Inc (N:TWTR) also moved to the new communication sector, which will include existing telecommunications sector companies: Verizon Communications Inc (N:VZ), AT&T Inc (N:T) and CenturyLink Inc (N:CTL).

Apple Inc (O:AAPL) will remain in the S&P information technology index, while (O:AMZN) will stay in the S&P consumer discretionary index.

At 18.7 times forward earnings estimates, the expanded communication services sector carries a higher valuation than the prior telecom sector, whose forward P/E was just 10.5 times, according to Thomson Reuters data.

The reworked information technology sector carries a forward P/E of 18.4 times, based on the data. The tech sector's prior P/E was 19.5 times.

The updated communication sector "will have a growth tilt and shed its current value-only bias," UBS strategists wrote.

While many individual investors will not need to worry about the changes, those who have big allocations to individual stocks and sector-based products may want to make sure their sector exposures are aligned with their investment objectives, said Edmund Tran, equity strategist at UBS Global Wealth Management's Chief Investment Office.

"If, for example, they invested in the telecom sector because they liked the very high dividend yield, which was around five-and-a-half percent, that's going to be drastically lower. So that's not going to be the defensive bond proxy sector that they're accustomed to," he said.

Wall Street's S&P communication sector starts with a whimper

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