Big Changes With New Communications Services Sector

Next month the Global Industrial Classification System (GICS) will launch a new sector: Communications Services. That sector will include the stocks formerly of the Telecom Sector (notably Verizon and AT&T), but also numerous stocks pulled out of the Information Technology and Consumer Discretionary sectors.

These changes modify the relative appeal of the Info Tech and Consumer Discretionary sectors.

This table shows how the top stocks in the new sector (represented by XLC, a new ETF with a head start on the new sector) come from sister sectors Info Tech (XLK) and Consumer Discretionary (XLY).

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Those are some big names leaving both XLK and XLY, going into XLC. Lots of movement among the so-called FAANG stocks (Facebook, Amazon, Apple, Netflix and Google [now Alphabet]). Facebook, Alphabet, and Netflix will compose 49% of the new sector. Apple remains in Info Tech (XLK) and Amazon remains in Consumer Discretionary (XLY).

We will have to rely on simulated histories going forward to compare each of these three sectors to their historical attributes. One such study provided by the sponsor of these ETFs shows Info Tech and Consumer Discretionary becoming more expensive relative to their simulated 15-year histories; and Communications Services less expensive than its history than the other two.

The PEG ratios (P/E over 3-5 yr forecasted earnings growth) is most attractive for Communication Services at 1.1, versus 2.0 for new Info Tech and 1.5 for new Consumer Discretionary.

This is the full list of members of the new sector along with their weights.

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Very recently Communications Services underperformed the other two simulations, because it holds FaceBook, which took a steep dive in late July from which it has not yet recovered.

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A backtested plot by Bloomberg of the returns of the new and two recomposed sectors shows each of the three simulations outperformed the S&P 500 since the market bottom in 2009 through April 30, 2018.

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Disclaimer: "QVM Invest”, “QVM Research” are service marks of QVM Group LLC. QVM Group LLC is a registered investment advisor.

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