Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Wednesday, March 8, 2023

On March 17, S&P Dow Jones Indices and MSCI will make changes to GICS sector classifications. These changes don’t happen very often so they are noteworthy when they occur. Some of the more recent changes included the reconstitution of the communication services sector, which used to be just telecom, but was expanded to include digital media/interactive entertainment (streaming), and the creation of the real estate sector, which was carved out of the financials.

Here are the changes that will take place next month from Dow Jones and MSCI:

• The Data Processing & Outsourced Services group within the information technology sector will be dissolved and the stocks will be reallocated to financials and industrials. Companies that provide services primarily related to payment processing will join the financials sector under a new group entitled “Transaction & Payment Processing Services.” The reclassification will add several growth stocks to the traditional value stocks in financials (which will be officially renamed “financial services”), most notably Visa (V), MasterCard (MA), and PayPal (PYPL).
• Stocks that offer services focused on human-capital management will move to the industrials sector. Within the S&P 500, this change affects three stocks representing less than 2% of the current info tech sector. Automated Data Processing (ADP) is the largest of these stocks.
• Some consumer discretionary stocks will shift to the staples sector. Within the S&P 500, the affected companies represent less than 5% of consumer discretionary market cap: Target (TGT), Dollar General (DG), and Dollar Tree (DLTR). It never made sense to us to separate Walmart and Target so now they are together as they probably should be.

Implications

The most notable change here is fintech and credit card processing names are moving to financials, giving the sector a bit of a growth boost. On the surface it might seem like the sector would become less interest rate sensitive because it will be less lending heavy, but the move may not affect interest rate sensitivity much. The growth names carry some rate sensitivity because of how much of their value is derived from profits well into the future. The move to financials for these stocks will make active managers who own these names more overweight financials (or less underweight) and less overweight (or more underweight) tech.

This may not sound like a big deal but it is for money managers who are benchmarked against sector performance. These changes are not as dramatic as the previous dramatic overhauls, but they are still meaningful. Tens of billions of sector strategies follow these indices so no doubt some money will be moving around to match these changes.

View enlarged chart

LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) has a positive view of the industrials sector, is neutral on consumer staples and financials, and negative on consumer discretionary and technology. The technology sector is a candidate for a potential upgrade based on improved technical analysis trends. The sector changes are not significant enough to drive a change in our sector views.

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