‘Use extreme caution,’ Nick Colas warns as S&P 500 plans massive tech shift

The S&P 500 is about to undergo a major structural change that may alter which technology stocks you own.

Facebook and Google's parent Alphabet will move out of the index's technology sector and to a newly formed communication services sector in about six weeks. The goal is to make tech appear less dominant in the S&P 500.

DataTrek Research co-founder Nicholas Colas calls it the highest profile change to S&P's sector weightings in at least three decades and suggests there could be dangers.

"That will really reshape how people think about the weightings of tech in the S&P," he said Monday on CNBC's "Trading Nation." "You're going to see a major downgrading of tech weightings in the S&P 500 when this change happens, and that's purely an illusion. That's just reclassifying the names and the sectors."

The reshuffling begins on Sept. 21. But the ETF industry is already taking steps to reflect the change.

It launched the Communication Services Select Sector SPDR Fund, also known as the XLC, on June 19. The new ETF includes Facebook and Alphabet, which have been components of the Technology Select SPDR Fund or XLK. That will leave Apple, Microsoft, Visa and Intel as the top holdings in the technology sector ETF.

"If you own names like XLK and XLY [Consumer Discretionary Select Sector SPDR Fund], which are huge ETFs, the combined AUM [assets under management] is worth $45 billion. Realize you're no longer going to own Facebook and Google in XLK. Or Disney and Comcast or Netflix or Twitter inside of XLY," he said. "So, if you like those names, buy them separately because they're no longer part of your holdings."

With all the changes, Colas suggests investors to be vigilant when it comes to the new classifications.

"You'll see it's a lot more volatile than the old telecommunications sector, and that's really a warning sign to me. It's a very heavily concentrated group," Colas said. "I'd say use extreme caution in looking at it, at least early on until you see how it trades. It's going to be very, very volatile out of the box."

Disclosure: Comcast is the parent company of NBC Universal.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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