In recent years, the lines between media, information-technology and telecommunications companies have blurred, creating some confusion among investors. Are Netflix and Facebook media or tech giants? If AT&T succeeds in acquiring Time Warner, will it be a telecom or a media behemoth?
Instead of answering these questions, several major stock indexes will rejigger some of their investment classifications to create a new “sector” starting in late September—and a new opportunity for investors who like to bet on particular sectors. This new sector, called communication services, is an expansion of the telecommunications sector that is expected to include the companies named above, plus companies ranging from Comcast and Google parent Alphabet Inc. to Verizon and Walt Disney Co. It likely will be the third biggest of the 11 sectors of the Standard & Poor’s 500 stock index.
Creating the new sector won’t affect broad indexes such as the S&P 500, but it will affect the performance of ETFs that track the S&P 500 sectors that are losing or gaining companies. Example: In 2017, the Technology Select Sector SPDR Fund (XLK) returned 34.3% compared with 21.7% for the S&P 500. But much of that outperformance was due to heavy weightings in Alphabet and Facebook (which returned 35.6% and 53.4%, respectively), two stocks the fund will no longer own.
What to do: Realize that the past performance of ETFs tracking sectors that are losing some of these companies may no longer be a good indication of how they will do in the future. And when deciding whether to invest in an ETF that tracks the new sector, keep in mind that it is more oriented to aggressive investors seeking fast-growing companies rather than to more conservative investors who found telecoms attractive.