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Some Big Sector ETFs Could Get New Looks

Some Big Sector ETFs Could Get New Looks

When it comes to the FANG stocks, the “A” and the “N” — Inc. (NASDAQ: AMZN) and Netflix, Inc. (NASDAQ: NFLX) — are classified as consumer discretionary names. Conversely, the “F” and the “G” — Facebook Inc (NASDAQ: FB) and Google parent Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) — reside in the technology sector.

Some investors believe the Global Industry Classification System (GICS) does not reflect Amazon and Netflix arguably being technology companies. As such, index providers Standard & Poor's and MSCI, two of the largest providers of benchmarks for use by exchange traded funds (ETFs) issuers, are considering changes to the consumer discretionary, technology and telecommunications services sectors.

Those changes could alter the rosters in big-name sector ETFs, such as the Consumer Discretionary Select Sector SPDR (NYSE: XLY) and the Technology Select Sector SPDR (NYSE: XLK).

Sector-Level Happenings

In a recently completed consultation with investors, S&P and MSCI's areas of focus included the media and Internet software & services industries. On the cable and telecom side, Verizon Communications Inc. (NYSE: VZ) resides in XLK while cable giant Comcast Corporation (NASDAQ: CMCSA) is a constituent in XLY, although the two companies are competitors.

“MSCI and S&P, the two firms that manage GICS, proposed creating a new communication services sector within GICS and completed an investment community consultation at the end of September to review how to classify all companies in the telecommunications services sector as well as portions of the consumer discretionary and information technology sector,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Monday.

Alphabet and Facebook are major holdings in XLK while Amazon is by far the largest member of XLY's roster.

Wide-Ranging Impact

If the index providers decide to do some GICS shuffling, XLK and XLY will not be the ETFs to be affected. Rival sector ETFs from Fidelity, iShares and Vanguard would see roster changes as could an array of smart beta sector funds.

“Any GICS shifts will create change for ETFs. Most of the assets in sector ETFs are tied to S&P- or MSCI-based indices,” said Rosenbluth. “The effect of any change to GICS will be felt not only in the U.S., but also globally. iShares offers a suite of global sector ETFs tracking S&P 1200 indices.”

For example, the $1.5 billion iShares Global Tech ETF (NYSE: IXN) devotes about 15 percent of its combined weight to Facebook and Alphabet, but that ETF does not holds shares of Amazon or Netflix.

CFRA has a Marketweight rating on IXN and an Overweight rating on XLK.

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