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Your Tech ETF Could Lose Some Of Its FANGs

ETF Professor

Earlier this year, Standard & Poor's and MSCI Inc., two of the largest providers of indexes for use by issuers of exchange traded funds, announced they were considering changes to the construction of some sectors. Consumer discretionary, technology and telecommunications were on that list.

The index providers confirmed Nov. 15 they intend to broaden the telecommunications sector and rename it Communication Services “to include companies that facilitate communication and offer related content and information through various media,” according to a statement.

The new communication services sector will be comprised of existing telecom firms as well as media stocks currently residing in the consumer discretionary sector and some current members of the technology sector. The Consumer Discretionary Select Sector SPDR (NYSE: XLY), the largest ETF tracking that sector, currently allocates 22.7 percent of its weight to media stocks, making that the ETF's second-largest industry weight.

Plenty To Think About

Among sector ETFs, telecom funds are overlooked relative to every other sector. Part of the reason for that is some cap-weighted telecom ETFs feature excessive weights to just two stocks: Verizon Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T). A different look could be just what old telecom ETFs need to attract more attention from investors.

“The companies being impacted have not yet been announced, though a select list of large-caps will be announced in January 2018,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Thursday.

Rosenbluth said CFRA believes Google parent Alphabet Inc (NASDAQ: GOOG) and Facebook Inc (NASDAQ: FB) are among the stocks currently residing in the tech sector that could join the new communication services group. Alphabet and Facebook currently combine for about 18 percent of the Technology Select Sector SPDR (NYSE: XLK), the largest tech ETF by assets.

Wide-Ranging Impact

Combine the assets under management for XLK and rivals such as the Vanguard Information Technology ETF (NYSE: VGT) and the Fidelity MSCI Information Technology ETF (NYSE: FTEC), and the total is over $40 billion, according to CFRA, meaning a massive amount of assets could be affected by the departures of bellwether stocks such as Alphabet and Facebook.

“Technology index ETFs and mutual funds will likely to continue to own Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT) even after the new communications services sector is created,” said Rosenbluth.

Apple and Microsoft combine for nearly 26 percent of XLK's roster.

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