Changes in store for S&P 500 index

Telecom group shifts to communications services, grows

This Jan. 17, 2017, file photo, shows Netflix on a tablet, in North Andover, Mass.  (AP Photo/Elise Amendola, File)
This Jan. 17, 2017, file photo, shows Netflix on a tablet, in North Andover, Mass. (AP Photo/Elise Amendola, File)

The lineups of three of the 11 groups that make up the benchmark S&P 500 index are being shuffled as of Monday. Twenty companies in the index, including famous names like Facebook, Alphabet and Netflix, will find a new home.

The most notable change will occur with the telecommunications group, currently the smallest piece of the market. It gets reinvented as communication services and grows from three to 19 companies, adding some key names from the technology and the consumer discretionary sectors.

The S&P's changes reflect the way the communications and media industries have evolved. AT&T and Verizon were once known as phone companies, but they're now media companies as well: AT&T just bought Time Warner, the parent of HBO and Warner Bros. movie studio, and Comcast bought NBCUniversal in 2013. Streaming services were a big reason for the telecom industry's shift, and now those companies will be in the same part of the market as Netflix.

The S&P index itself will still be made up of the same 500 companies, but the moves could change how investors think about them and how they approach the market. Analysts will help shape those views as they publish research on the new sector.

The stock market could become a bit more volatile since many exchange-traded funds and other funds offer products that track the S&P 500's sectors. They'll make trades to match the changes in the S&P 500.

The three companies in the telecom group right now are AT&T, Verizon and their smaller peer CenturyLink. Next week they'll be joined in the new sector by some broadcasting and media companies, video-game publishers and social media companies. Alphabet and Facebook are the most notable additions -- their combined value of about $1.25 trillion will account for about half of the new sector's total value.

The old telecommunications sector has been considered a safe bet, because AT&T and Verizon pay big dividends and their stocks tend to do well when the broader market declines. The new sector looks a bit riskier.

Sam Stovall, chief investment strategist for CFRA, said the new sector is characterized by "Very volatile or cyclical companies like Netflix [and] Facebook that are going to be very high growth oriented when the market is doing well, and could get absolutely slammed when the market goes down."

Consider that shares of Alphabet and Facebook have struggled since July. Netflix and Twitter -- another company moving from tech -- also suffered sharp declines over the summer as investors worried about their user growth and the possibility of new regulations affecting their earnings.

Stovall says utility companies and makers of consumer goods will still act as defensive options for investors, but they'll have to be more selective in finding companies that offer protection in an economic slowdown.

Along with Alphabet, Facebook and Netflix, the communication services sector will include broadcasters like CBS and Discovery, cable and Internet companies like Comcast, movie studios such as Disney and video-game-makers like Activision Blizzard. Stovall said the technology, consumer discretionary and communications sectors will be more "pure plays" after the move, meaning they will each be a bit more straightforward and focused on specific industries.

As they are currently composed, the technology and consumer discretionary sectors are by far the best performing parts of the market. Both have risen about 30 percent over the last year. No other sector has risen even half that much, and the S&P 500 itself has gained 16 percent over the past 12 months. High-dividend companies have hardly moved over that time, and the telecom sector is up just 1.5 percent.

The technology sector will remain the biggest part of the stock market, although its share of the S&P 500 drops to 20 percent from 26 percent.

Microsoft and Apple will be the biggest companies in the sector by far. Other remaining technology companies will include chipmakers like Nvidia and Intel, software-makers like Adobe, payment technology companies like Visa, hardware companies like NetApp and components-makers like Oracle.

"Legacy hardware and semiconductor companies are just that, they're legacy," said Stovall. "Internet software and services, that's sort of the future."

About 60 companies will stay in the consumer discretionary sector, and Amazon, the largest company on the U.S. market after Apple, towers above the others. Home Depot, McDonald's and Nike will occupy more prominent positions in a sector that also includes hotels, restaurants and car companies. In a related move, payment company eBay will shift from technology to the consumer discretionary group.

Business on 09/21/2018

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