Industry Updates

Tech sector concentration ‘unfavourable’ following GICS sector changes

Reclassification strengthens the argument for equal-weight ETFs, BofA says

Theo Andrew


Technology sector concentration has increased after payment giants Visa, Mastercard and Paypal were reclassified to financials in the latest changes to the Global Industry Standard (GICS) sectors.

Following the rebalance on 20 March, technology’s weight in the S&P 500 fell from 28% to 25% while financials rose from 12% to 15%.

It leaves the sector more concentrated than ever, with Apple and Microsoft accounting for over 47% of the sector alone while financials become “more expensive, crowded and growthier”, analysts at the Bank of America (BofA) warned.

“The changes reinforce our unfavourable view on tech and discretionary ETFs, which will grow more concentrated. We prefer equal weight sector ETFs,” the BofA analysts added.

The changes are likely to have a big impact on ETFs including the $3bn iShares S&P 500 Information Technology Sector UCITS ETF (IUIT) and the $537m SPDR S&P U.S. Technology Select Sector UCITS ETF (SXLK).

According to the BofA, the financial sector’s price-to-earnings ratio will rise by 9% from 13.3x to 14.5x, with the payment stocks moving over trading at a 60% premium to the rest of the sector at 22x price-to-earnings. They will comprise 19% of the sector.

“Financials investors may welcome the opportunity to own payment stocks,” BofA analysts said. “While most trade at a premium versus the sector, we believe the higher valuations are justified given generally higher growth/margin profiles and less risky balance sheets versus financials.”

Meanwhile, several other companies will move from the technology sector to industrials including human resources management software companies Automatic Data Processing and Paychex.

The changes were earmarked following a consultation by S&P Dow Jones Indices (SPJDI) last year, with the full list of changes published last December.

At the time, the decision was also taken not to carve out clean energy companies as a new classification, leading industry experts to suggest thematic ETFs would be one of the big winners from the changes, with investors having to target renewables through specific exposure. 

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