Let's Talk About Communication

Dec. 06, 2018 5:29 AM ET
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By Hamish Preston

One of the largest ever changes to the Global Industry Classification Standard (GICS) went into effect prior to the open on Monday, 24th September, affecting around 10% of the S&P 500's market capitalization. In case you missed our previous announcements, here is a brief explanation of GICS, what changed, and why these changes went into effect.

What is GICS? The Global Industry Classification Standard was created in 1999 to unify definitions about different market segments. GICS assigns each company to one of the 158 (157 before September 24th) possible sub-industries, which then determine - in decreasing order of granularity - one of 68 possible industries, one of 24 possible industry groups, and one of 11 possible sectors.

Exhibit 1: GICS Hierarchy

What changed? The GICS update involved expanding the Telecommunication Services sector to include some constituents from the Consumer Discretionary and Information Technology sectors. Exhibit 2 shows the composition of the resulting sector, now named Communication Services, for large-cap U.S. companies (the area for each constituent is proportional to its weight in the sector). You'll notice a number of the so-called FAANGs are constituents.

Exhibit 2: Many FAANGs are constituents of the S&P 500 Communication Services sector

Why did these changes happen? The manner in which people, businesses, and communities communicate has changed dramatically. These developments didn't occur overnight, but they do mean that communication is now far broader than telecoms. The chairman of our Index Committee, David Blitzer, provided greater clarity on the thinking behind the sector in a prior post. Here is one of his charts.

Exhibit 3: The way we communicate has changed over time

Have similar changes happened before? Yes, the last GICS update occurred in September 2016, when Real Estate became a standalone sector (previously, it was part of Financials). More broadly, the GICS changes recognize only the

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