That technology has become too large a part of the S&P 500 is clear to all. At 26 percent of the index, it is a much larger component than weightings in the Russell 2000 (15 percent), the S&P Mid Cap (16 percent) or Small Cap (15 percent). But what can an index committee do in the face of seemingly endless investor appetite for mega-cap tech names?
The answer is simplicity itself: Move some heavyweight tech names and a smattering of consumer stocks (for more diversification) into another industry classification. That's exactly what is happening in September. While that may seem like a long way off, we prefer to highlight issues like this earlier rather than later.
Here is what is happening:
Digging down into the specific names involved in this shift and the stock composition of the new sector, there are three things to know:
Facebook's weighting in the new sector is 18.4 percent; GOOG/GOOGL is a combined 25.8 percent. Activision (4.5 percent) and Electronic Arts (4.2 percente) also have notable weightings.
2. From Consumer Discretionary, the important names shifting to Comm Services are Disney and Comcast (both 5 percent weightings in the new sector). Netflix (3.9 percent) is also in the mix here, as are Twitter (2.2 percent) and CBS (1.9 percent).
3. With all due respect to the folks at S&P Dow Jones Indices, the new Communication Services sector is an odd construction. Specifically:
The upshot here is that Communication Services may not be as attractive an investment vehicle as the "old" Tech and Consumer Discretionary groups, and that has important implications because of the ETFs/"passive" assets that track these sectors.
A few points here:
This has been a grimy, technical note so one big picture thought to close it out: Tech's dominance at the top of the US equity market cap table is a real issue here. The S&P Dow Jones Indices committee faces the same problem as investors – how do you manage diversification when Tech is eating the world? Be prepared to hear a lot of "this must be the top in Tech" as more market commentary focuses on the issues we've presented here.
—By Nicholas Colas, co-founder of DataTrek Research