In creating the communications services sector — which now has its own ETF, the Communication Services Select Sector SPDR (XLC) — the S&P has eliminated one the market's most popular defensive equity plays.
"The real hole that will emerge is a reduced number of defensive GICS [sectors]," said Kim Arthur of investment company Main Management, which uses ETFs in its strategies. He said with telecom gone, all that is left as a true defensive sector is consumer staples, represented by the Consumer Staples Select Sector SPDR ETF (XLP).
"The telecom sector is traditionally seen as a defensive sector and a value play. The revamped communications services sector will be seen as a cyclical sector with much stronger growth prospects," Mishra said.
During the current bull market run led by growth stocks, some market strategists have claimed value investing is dead. The big sector moves offer some support for that theory. The new communications index will be 61 percent growth stocks, whereas the telecom index was 100 percent value stocks.
Other sectors with defensive aspects don't offer the combination that telecom did: The ETFs tracking utilities (XLU) and energy (XLE) are a mix of interest-rate sensitivity/defensive, while the health-care ETF (XLV) is growth/defensive.
Higher weightings to Apple and Microsoft will help the tech sector to preserve a higher earnings multiple, but a case can be made it is now the tech sector not telecom that is more of a value trade, with less than half of the new index in growth stocks. XLK will see its dividend yield decrease, but by an amount that is not significant for yield-seeking investors. It will go down from 1.39 percent to 1.37 percent on Monday, according to data from State Street Global Advisors. Big dividend stocks AT&T and Verizon are coming out of XLK, but they were small weights. The removal of non-dividend payers like Facebook and Google is being offset by increased weightings in the tech sector's more value-oriented stock set, and big dividend payers, such as Apple, Microsoft, Cisco Systems and Texas Instruments.