Tech Stocks: Is a Reckoning Coming?

Posted On July 10, 2018 1:30 pm

We’ve seen Facebook’s founder Mark Zuckerberg face Congress and Google hassle with Euro regulators and emerge mostly unscathed. But do these network behemoths face a bigger challenge in coming weeks? Reuters thinks a reckoning is coming for tech stocks:

This time the culprit would be the largest-ever shakeup of the stock market’s broad business sectors, which will mean some of the hottest stocks, like Facebook and Google parent Alphabet, will shift from their traditional homes in the top-performing technology sector and into a deepened pool of telecommunications and media stocks.

The sweeping reorganization of the Global Industry Classification Standard, or GICS, means that funds tracking the telecom, tech and consumer discretionary sectors will be forced to trade billions of dollars of stock to realign their holdings by a Sept. 28 effective date.

While the choppiness many investors expect to see is unlikely to hit stocks in quite the same way that wave of the global uncertainty did in early 2018, the fact that so much money must be shifted among index funds in a short time will cause a stir.

In a bid to ensure a smooth transition, leading fund provider Vanguard Group has have already started adjusting its sector exchange-traded funds, or ETFs, while State Street Global Advisors is launching an entirely new fund.

Other investors predict price swings and commotion on trading desks if last-minute sales of Alphabet and Facebook shares by heavyweight technology index funds dwarf demand from a handful of telecom funds buying those stocks.

“There’s probably going to be net selling,” said Andrew Bodner, president of Double Diamond Investment Group in Parsippany, New Jersey. “That will be a temporary scenario, and it could be a good buying opportunity for a lot of those stocks.”

Maintained by S&P Dow Jones Indices and MSCI since 1999 and widely used by portfolio managers, the GICS classifies companies across 11 sectors. The newest, real estate, was split off from financials in 2016. The upcoming changes, which have yet to be finalized, are meant to reflect evolving industries.

Facebook and Alphabet will move from information technology and sit alongside AT&T Inc and Verizon Communications in a broadened telecommunication services sector that will be renamed communications services.

Consumer Discretionary heavyweights Walt Disney, Comcast, Netflix and others will also join the newly defined sector – major changes that will affect investors in sector-focused funds.

U.S. science and technology ETFs have $78 billion in assets, and many will have to sell their shares of Alphabet and Facebook as the changes kick in, according to Thomson Reuters Lipper data. Telecom ETFs, with around $4 billion in assets, will have to buy shares of those companies, while selling some of their investments in AT&T, Verizon and other current constituents to make room for the entrants – trades that will certainly create a surge in volume as well as volatility if not choreographed.

“Stocks will be trading differently than the fundamentals just because of the buying and selling pressure that is going to take place,” said Todd Rosenbluth, director of ETF and Mutual Fund Research at CFRA in New York.

The reorganization may also make it difficult to analyze investments as statistics for each sector, like earnings growth and valuation multiples, will change drastically. The telecom sector’s dividend yield of over 5 percent will shrink to 1 percent.

“These changes have really upended the apple cart, and investors need to ensure they know all of the changes before they take effect,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, of the upcoming restructure.

 Related: Is a Summer Slide Coming? Here’s What We Know. 

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