Barron’s reported that S&P Global is downsizing the technology sector by moving some companies to other industries, so it wouldn’t be surprising if technology stocks see volatility ensuing.
Technology stocks have outperformed for years, giving Big Tech a huge share of the S&P 500’s total value, so the index will be rebalanced.
Since the beginning of March 2009, the Technology Select Sector SPDR ETF (XLK-US) has risen nearly eight times, well above the S&P 500’s gain of a little more than three times, bringing the total market capitalization of the technology sector to about $9.5 trillion, or about The broad index rose nearly 29 percent, making technology the biggest sector by far.
This is about to change. The rebalancing of the S&P 500 index will take effect next Monday (20th), and some technology stocks will enter the financial and industrial fields, so that the index can still reflect the broad economy of the United States, rather than a tool that mainly reflects the state of the US technology industry.
Roughly $1.15 trillion worth of technology stocks are shifting toward financials and industrials, mostly toward the former, with Visa (V-US), Mastercard (MA-US), PayPal (PYPL-US) and Fiserv (FISV-US) set to into the financial sector, while Paychex (PAYX-US) into the industrial sector.
According to Goldman Sachs, that means tech stocks will account for slightly less than a quarter of the index’s overall market capitalization, with financials rising to 14% from 12% previously.
Investors should expect short-term volatility in these stocks. Goldman Sachs strategists wrote that mutual funds may make some trades to overweight financials and underweight technology stocks before rebalancing.
Technology stocks have been under some pressure on Friday (17th), and most of them underperformed the 0.4% gain of the S&P 500 Technology ETF. Visa, PayPal, Fiserv and Paychex all closed lower.
Regardless of the optimism for tech stocks on Friday, they could still end up dragging those stocks higher, but most should underperform the sector as sell-offs from index rebalancing offset fundamental-driven buying.
There could also be more action next Monday, with ETF issuers having to rebalance to reflect industry changes, meaning financial ETFs will buy some tech stocks and sell some existing financial assets to make room, but Goldman Sachs reckons that’s a negative for stocks. The impact is not significant, and the total trading volume should be less than 1% of the current market cap.
This has happened before, with stocks typically considered tech companies listed in other industry sectors in the S&P 500, such as Netflix (NFLX-US) and Facebook predecessor Meta Platforms (META-US) in 2018 Moving to communication services, the changes have had a big impact on ETFs and other funds.
The good news for investors, however: These businesses haven’t changed, and neither has the way they are valued.
