US market shake-up will reduce tech dominance

If given the green light, the share of the US market classified as information technology will fall.

25th October 2021 11:03

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Currently, information technology accounts for around 28% of the S&P 500.

The tech sector could become less dominant in the S&P 500 following a proposed shake-up of the Global Industry Classification Standards (GICS).

GICS is an industry taxonomy jointly developed in 1999 by MSCI and S&P. The classification places companies fitting into one of 11 sectors, as well as more numerous industry groups and sub-industries. The sector classification is usually cited on fund or index factsheets.

Both MSCI and S&P have launched a joint consultation of industry professionals to make several changes to the classification.

Most notable is the proposed reclassification of several large-cap technology stocks. It has been proposed that Visa (NYSE:V), PayPal (NASDAQ:PYPL) and Mastercard (NYSE:MA) leave the information technology sector and be added to the financial sector.Automatic Data Processing (NASDAQ:ADP) and Fidelity National Information Services (NYSE:FIS) will also shift from tech to the industrials sector.

If these proposals are implemented, the share of the US market classified as information technology will fall. Currently, information technology accounts for around 28% of the S&P 500, while the MSCI USA index has roughly the same proportion. That’s roughly the same as the next two sectors (healthcare and consumer discretionary) combined. The changes would also give a boost to the weighting of financials, which currently stands at 11%.

Of course, this won’t mean that the US market will be any less dominated by tech-like stocks. Many large-cap shares broadly seen as ‘tech’ are not part of the official category, including Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB) and Google's Alphabet (NASDAQ:GOOGL). In 2018, Facebook, PayPal and Alphabet were moved from the information technology sector to the renamed communication services sector.

The changes will have no effect on investors using US market tracking exchange-traded funds (ETF).

Where the changes will be felt, however, is in US sector ETFs. For example, the iShares S&P 500 Info Tech Sect ETF$Acc (LSE:IUIT) currently has a weighting to PayPal, Visa and Mastercard of more than 10%. Those shares would be removed from the ETF if they are reclassified as financials.

Meanwhile, investors in the Invesco Financials S&P US Select Sec ETF (LSE:XLFS) will gain notable exposure to these three companies. All three have a notably bigger market cap than Wells Fargo (NYSE:WFC), the fourth-biggest holding in the US financials ETF.

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