Late last year, the S&P Dow Jones Indices and MSCI Inc., provider of research-based indexes and analytics, announced the Telecommunication Services Sector will be changed to Communication Services and will evolve to include companies that facilitate communication and offer information through various media.
The changes, expected to take place September 28th, 2018, will move the weighting of the sectors and could increase your existing investment risk so it’s important to understand them. Companies that were classified as Information Technology such as Alphabet (Google) and Facebook will move into this new Communication Services sector, along with Disney and Netfix.
Before the change, Telecommunications made up just 3% of the S&P but under it’s new structure it will account for over 10%, making it the fourth largest sector after Information Technology, Financials, and Healthcare.
How does this affect you?
Telecommunication Services – now named Communication Services will change greatly. Prior to the change, the 5 largest companies in the sector as of 2018 were Verizon, China Mobile Ltd, AT&T, Vodaphone Group, and Japan’s Softbank Corp. Alphabet and Facebook alone will now make up 49.9% of the total market cap for the Communication Services sector.
The Information Technology sector will feel the loss of Alphabet and Facebook as Apple, Inc’s percentage of the total market cap will move from 15% to 20%. Amazon, which falls under Consumer Discretionary in the Communications Services sector will now account for 35% of Consumer Discretionary up from 27%.
The takeaway for us here is to pull up our investments including our 401k’s and evaluate how these changes might affect our investment strategies and certainly our risk tolerances, and rebalance where necessary. For example, if you are invested in any Telecommunication ETFs such as Vanguard’s Telecommunication Services ETF you will want to consider how these changes could possibly add additional risk to your investments. We learned this year that just one negative news cycle about customer data and privacy can cause a 20% drop in stock price. If you were invested in a telecommunications ETF to avoid volatility, now is the time to pull up your investments and make changes that fit with your risk tolerance.