Rick Welch: Dollars and $ense

Sub Levels

A sector is an industry classification or grouping of companies that share common characteristics. The most common structure of industry sectors, the Global Industry Classification Standard (GICS), divides the equity universe into 11 sectors: utility.

Sectors have many advantages, such as their typically static composition, distinct patterns of volatility, and low correlation with each other. In addition to sector allocation, GICS further categorizes companies into industry groups, industries and sub-industries. According to MSCI (co-developer of GICS), “Companies are classified quantitatively and qualitatively and are assigned a single his GICS classification at the sub-industry level according to their main business activity.”

Since GICS was developed in 1999, there have been some major changes in its structure, first in 2016 and then in 2018, with the most recent change taking effect on March 17th of this year. Recent GICS changes are not as significant as those in 2016 (real estate became a sector) and 2018 (telecommunications services became a larger telecommunications service), but industries were eliminated or created. will bring about industrial-level change.

The latest changes impacted the composition of five sectors of the S&P 500 (Consumer Discretionary, Consumer Staples, Financials, Information Technology and Industrials), resulting in the reclassification or Includes new sub-industry allocations. S&P 500. Eleven of the 14 reassigned companies exit the technology sector.

The largest group (8 companies) comes from the data processing and outsourcing services sub-industry and is moving into the new transaction and payment processing services sub-industry (finance). These eight companies, which include credit card giants Visa and Mastercard, account for 2.7% of the S&P 500 and 10.6% of him in the IT sector. This makes sense. We have long wondered why these payment processors were not assigned to the financial sector.

Three companies will also exit the transaction and payment processing services sub-industry: HR service providers ADP and Paychex, and Broadridge Financial Solutions. The final three companies to be reassigned are Target, Dollar General, and Dollar Tree, currently classified in the General Merchandise Store sub-industry (Consumer Discretionary) and a new Consumables Retail sub-industry (Consumer Staples). is moving to In addition to the aforementioned company repositioning, there are several further structural changes at both industry and sub-industry levels.

What does this mean for me as an investor? We believe that by focusing on industry sectors, investors will have a clearer understanding of where stock returns are being generated. A sector rotation strategy provides an efficient means of adjusting the weights of stocks in your portfolio based on an understanding of where you are in the current business cycle.

The recent GICS changes are favorable to investors as they make the component relationships within the affected sectors clearer and more precise. These changes will impact the sector characteristics and benchmarks, positioning and risk/return profiles of mutual funds and ETFs benchmarked against GICS-based indices. For equity portfolios of investors focused on industry sectors, to minimize tracking error and to adequately account for the stock- and industry-specific risks of the individual companies and sectors involved in this reclassification, A rebalance may be required.

Rick Welch is a Registered Investment Advisor (RIA) and Chief Investment Officer for Academy Wealth Advisers. He can be reached at 215-603-2976 or rickwelch@academywealthadvisers.com.

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