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How Equity Market Sectors Are Evolving
Anna Ellis, CME Group
AT A GLANCE
- Changes to the Global Industry Classification Standard adjusted the sector weights in the S&P 500
- Sector futures provide a way to manage risk related to the 11 GICS sectors and gain exposure to changes impacting differing sectors of the market
As market cycles develop, broad, one-size-fits-all strategies don’t work for all investors. Economic challenges can emerge, and quickly change how investors view a particular market sector.
For those investors with exposure to specific sectors updates to the Global Industry Classification Standard (GICS) are a closely watched event.
On March 17, updated GICS weights were implemented, affecting indexes like the S&P 500, S&P MidCap 400, and S&P SmallCap 600. While the GICS is reviewed on an annual basis, the latest changes mark the first time major updates were made to the standard since 2018. The evolution of GICS over the years is an illustration of how much equity markets have grown, underscoring the importance of managing sector exposure amidst this evolution.
There are currently 11 GICS sectors and these sectors form the basis of how equity markets classify publicly traded companies. The latest GICS changes involved the re-classification of numerous companies into different sectors, ultimately causing changes to sector weights, as well as the re-distribution of more granular industry and sub-industry groups within individual sectors. All in all, six out of the 11 sectors were impacted by the GICS changes.
Most notably, these re-classifications caused index weight changes to the Financials and Information Technology (IT) sectors in the S&P 500, which increased by 2.7% and decreased by 3.2%, respectively. While these updates do not impact an investor’s overall exposure to the S&P 500, they do highlight the importance of managing sector exposure during times of change.
What This Means for Investors
The changes to GICS are a reminder that equity markets are constantly evolving and therefore market participants should be careful not to stay complacent with their existing allocations, particularly if their portfolio follows a certain sector.
An interesting takeaway from this year’s changes is the update made to the IT sector. This sector declined by 3.2% in the S&P 500 as a result of the discontinuation of the Data Processing & Outsourced Services sub-industry. This sub-industry historically classified those companies providing payment processing services, including companies like Visa, MasterCard, and PayPal. Following the GICS, this group was re-distributed across the Industrials, Financials and Consumer Discretionary sectors, resulting in a new sub-industry within the Financials sector titled Transaction & Payment Processing Services. As a result, the companies listed above now reside in the Financials sector, showcasing how these business sectors have evolved over time.
The GICS changes reflect the growing need to properly account for a company’s business activities, ultimately ensuring market participants can accurately assess the performance of the overarching sectors.
For those market participants that have more sector-specific strategies, they may find they need to adjust their portfolios to maintain existing sector exposures as a result of the GICS changes, and futures can be a useful tool to accomplish this.
Managing Sector Risk
Sector futures provide a vehicle for market participants to manage their exposure to sectors and rebalance when necessary.
CME Group lists futures on the 11 GICS sectors, in addition to 8 other sectors, and these products can be traded in multiple ways, including on CME Globex, through Basis Trade at Index Close (BTIC) transactions to target the cash close, and via derived blocks, a new functionality added in May 2022.
Read More About Sector Futures
Sector futures have experienced growing interest over the years, reaching over 20,000 contracts traded each day on average. Open interest – or the number of unsettled contracts – stands at nearly 350,000 across the CME Group sector futures suite as of March 2023.
CME Group’s E-mini Select Sector Futures follow the same structure and composition as the underlying S&P sector indexes, making them an attractive way to manage sector exposure.
The growth in sector futures highlights the increasing demand from market participants to manage sector exposure. GICS ensures the exposure that each sector classification provides is accurately reflected by the underlying constituents’ main source of revenue. The ability for GICS to evolve over time makes sure that sectors remain both current and as useful as ever.