Those who wait to rebalance their holdings may see their performance deviate widely from the new benchmark
Due to recent changes in the Global Industry Classification Standard (GICS), tech giants like Facebook, Twitter, and Alphabet have moved from indexes long used by tech ETFs into a new “communications services” group. For investors in those ETFs, that means names that have been synonymous with the rise of tech in the US will no longer figure in their funds’ holdings and performance.
Still, investors don’t seem to be in a hurry to follow those companies out. According to the Wall Street Journal, US-based State Street’s US$22.8-billion Technology Select Sector SPDR ETF liquidated its holdings of Facebook, Twitter, and Alphabet two weeks ago; the US$22.6-billion Vanguard Information Technology ETF, meanwhile did the same over several months.
“Yet the two ETFs combined have seen just $4.3 billion in outflows, less than 10% of their combined assets, since the S&P 500 changes were implemented at the opening bell on Sept. 24,” the Journal said.
State Street’s tech ETF let go of 9.2 million Facebook shares worth US$1.5 billion, as well as 2.3 million Alphabet shares worth US$2.7 billion.
According to Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors, the remaining stocks in their fund’s tech ETF have done well so far. But he warned that investors who don’t rebalance might see their performance veer widely from the new benchmark, especially in case of a big market move. The approach of earnings season, which often triggers outsized gains and losses, represents another risk.
“Given the size of the companies involved, and the potential impact of tracking error, I would’ve thought there’d be more action than there has been,” Bartolini said. “[E]very day they wait, that tracking risk is going to get bigger and bigger.”
The delay in changing portfolios could be because of asset managers’ reluctance to sell the tech ETF at a profit, thus triggering taxable gains for clients. Another possibility is that managers want to avoid a stampede and just rebalance gradually. This is reflected by gradual flows out of State Street’s Consumer Discretionary Select Sector SPDR, which saw US$582 million in outflows from Monday through Thursday last week after it sold millions of Netflix and Disney shares worth a combined US$1.8 billion.
Meanwhile, the firm’s new Communications Services Select Sector SPDR ETF, which was launched in June and now holds shares of Facebook, Twitter, Alphabet, Netflix, and Disney, has taken in nearly US$2 billion in new assets since the start of the month.
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