Is the 2023 GICS Sector Reclassification a Strategy Changer?
This year’s Global Industry Classification Standards (GICS) changes will include several reclassifications which will have a large impact on the weighting of several different broad sectors along with investment strategies.
Why the 2023 GICS Changes Matter
While there are several small changes taking place, there are some key reclassifications that will materially impact the broad sector weightings and possibly investors’ investment strategies.
Here are the material changes:
- Both Visa (V) and MasterCard (MA) will be moved out of the Technology sector and into the Financial sector.
- ADP (ADP) will also be moved out of Technology and into the Industrial sector.
- Target (TGT) will be moved out of the Consumer Cyclical sector, and into the Consumer Staples sector.
These reclassifications are material because each of those four companies sit in the top ten of their current sectors by market cap.
With the Financial sector picking up both Visa and MasterCard, it becomes the biggest gainer of all 11 sectors and will establish itself in 3rd place behind Information Technology (#1) and Health Care (#2).
Information Technology will still maintain its position as the largest sector, but it is losing over 3% of its total weighting within the total S&P 500 – the most of any other sector in the reclassification.
With ADP moving into the Industrial sector, it will bring that sector S&P 500 weighting up to 9.1%, which is just slightly lower than the Consumer Discretionary sector which lost Target to the Consumer Staples sector. All other sectors remain unchanged. The graph below shows the difference between the existing classification (blue) and the new upcoming classification (yellow).
If you maintain an investment strategy that focuses on ETF sector selection, this change is something to stay aware of.
If you’re a MONUMENT CLIENT IN THE MWM ETF STRATEGY, see more below.
Going Deeper on the GICS Rankings
The GICS rankings attempt to provide a framework for companies to be broadly classified and grouped together for research and strategy purposes. What it is really trying to do is to take into account how the market perceives these companies to provide both comprehensive and transparent groupings.
If you think about GICS as a hierarchy, the segmentations look something like this (from biggest to smallest):
- 11 Sectors
- 24 Industry Groups
- 69 Industries
- 158 Sub Industries.
Today I am just sticking with the 11 large sectors for this discussion. As a reminder, those eleven are:
- Energy
- Materials
- Industrials
- Consumer Discretionary
- Consumer Staples
- Healthcare
- Financials
- Information Technology
- Communication Services
- Utilities
- Real Estate
The groupings are reviewed annually with the intent of making sure general market segments reflect reality as companies shift strategy and products. While small updates happen annually, there are certain years where there are dramatic impacts on how the sectors are constructed and classified.
For example, one of the more impactful changes took place in 2018, which included shifting several companies out of the Information Technology space and the Consumer Discretionary space and into a brand-new Communications sector. That change saw some of the big giant tech names such as Facebook, Google, and Netflix consolidated into this new sector.
Another change took place in 2016 when the Real Estate sector was introduced as its own standalone sector.
The Bottom Line
Every few years we see material changes that reclassify how markets and sectors are defined. This upcoming reclassification is one of those material changes. Since these four sectors are being reorganized, it’s particularly important to be aware of any existing investments you have in sector ETF funds and ensure that they are still in a proper weight given your portfolio strategy.
The Monument Wealth Management Asset Management Team will be taking a look at sector exposure in our MWM ETF Portfolio and making some changes this quarter. Please call us if you have any concerns about upcoming changes in your ETF portfolio and how it may impact your tax picture.
Our ETF portfolio is coming up on its 20-year anniversary and is one of our longest-standing strategies. Changes to this strategy invariably involve capturing long-term capital gains. And while we are always trying to be tax-sensitive, we believe that it is more important to manage the portfolio for future growth than it is for tax avoidance.
Keep looking forward,
David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.
Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.