Keeping Score tomorrow

a new S&P 500 sector breakout

Announced last November, a new S&P sector arrangement went into effect last Friday.

Telecom, with only three constituents and about a 2% market weighting, disappeared and was replaced by the new Communication Services sector.

The latter contains former telecom names + enough heavyweights from IT (e.g., Facebook, Alphabet, Activision, Electronic Arts) and Consumer discretionary (e.g., Disney, 21st Century Fox, Comcast, Netflix) to give the new sector a total of 26 constituents and about a 10% market weighting–clipping a total of eight percentage points from IT + Consumer discretionary.

 

revised overall sector weightings:

IT .    21%

Healthcare .    15%

Financials .         13.3%

Consumer discretionary .         10.3%

Communication services .         10%

Industrials .         9.7%

Staples .         6.7%

Energy          6.0%

Utilities .         2.8%

Real estate .         2.7%

Materials .         2.4%.

 

my thoughts

–Telecom was a mature sector–if sector is the right word for three stocks–with large, high-dividend companies in it.  So it had defensive characteristics.  Not Communication, though, which contains a bunch of high-multiple, low/no yield components.

–The old Wall Street saw is that any sector is in for big trouble when it breaches 25% of the S&P 500’s weight.  That’s no longer the case with IT, but the change is obviously artificial.

–Splitting the index  sectors into highly cyclical, somewhat cyclical and defensive comes out like this:

Highly:  Materials, Industrials .  ~12% of the S&P

Defensive:  Real Estate, Utilities, Staples .   ~12% of the S&P

Somewhat cyclical:  everything else.      ~76% of the S&P.

Nothing has really changed, but parsing it out like that makes the index look like it has almost no defensive characteristics.  The lower weight for IT makes the index look less risky: this does the opposite–if only by about 2 percentage points.

–There’ll be new passive ways to bet on the Communication sector

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