Thematic ETFs are likely to be the biggest winners from the latest proposed changes to the Global Industry Classification Standard (GICS) sectors which is set to ignore areas such as renewable energy.
It comes after the decision not to adopt original proposals including the classification of renewable energy companies and cannabis, meaning investors will have to continue to invest in these areas through targeted exposure.
Furthermore, the changes are likely to shrink the dominance of the tech sector after revisions to the way payment processing companies are classified will see them join the financial sector.
The S&P Dow Jones Indices (SPDJI) and MSCI outlined changes in a joint statement on 31 March, with the full list of companies set to be published in December and the plans to be implemented in March 2023.
Athanasios Psarofagis, ETF analyst at Bloomberg Intelligence, said: “This is likely to be a net positive for those thematic and sector ETFs since investors will need to target them separately.
“I am a bit shocked they decided not to carve out renewable energy, given the big focus on ESG.”
SPDJI and MSCI said the decision not to reclassify renewables, for now, came following a consultation period after feedback suggested there was no clear way to reflect the changes in the GICS.
“Although there is a rapid growth in investment and capacity in the renewable energy generation space that is transforming the competitive landscape of both the energy and utilities sectors…feedback from clients and additional internal analysis suggests that there is not a consensus yet on how to reflect these changes in the GICS structure,” the statement said.
Elsewhere, the reclassification of the payment processing companies means the tech sector is likely to lose several of its largest stocks.
It is thought the likes of Visa, PayPal and Mastercard could move into a newly created sub-sector of financials – called Transaction and Payment Processing Services – following market feedback.
Psarofagis added: “Companies such as Visa and Mastercard are getting pulled, according to the new changes. This also means that tech, which is already rather concentrated, now gets a bit more concentrated.”
The changes are likely to have a big impact on several sector ETFs. Both the $3.4bn iShares S&P 500 Information Technology Sector UCITS ETF (IUIT) and the SPDR S&P U.S. Technology Select Sector UCITS ETF (SXLK) are likely to become more consolidated following the changes while financial ETFs including the $1.9bn iShares S&P 500 Financials Sector UCITS ETF (IUFS) more diversified.