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New Communication Services Sector

The S&P 500 telecommunication sector is getting a new look. For years, the telecom sector has been one of the smallest sectors in the S&P and dominated by two names; Verizon and AT&T. This fall, the telecom sector will be replaced with a new sector labeled as the ‘Communication Services Sector’. As the name implies, the new sector will be more geared towards the way that media is now delivered to customers such as streaming and downloads. Morgan Stanley Capital International, typically abbreviated MSCI, summarized the new sector on their website:

The last several years have seen an evolution in the way we communicate and access entertainment content and other information. This evolution is a result of integration between telecommunications, media, and internet companies. Companies have further moved in this direction by consolidating through mergers and acquisitions and many now offer bundled services such as cable, internet services, and telephone services. Some of these companies also create interactive entertainment content and aggregate information that is delivered through multiple platforms such as cable and internet, as well as accessed on cellular phones.

The new sector will be comprised of names pulled from the Information Technology, Consumer Discretionary, and the old Telecom sector. In addition to AT&T and Verizon, the top 10 holdings in the new Communication Services Index will include three of the four FANG stocks – Facebook, Inc. (FB), Netflix, Inc. (NFLX) and Google parent Alphabet Inc. (GOOGL). The other notable holdings include Disney (DIS), Activision Blizzard (ATVI), Comcast (CMCSA), and Charter Communications (CHTR). "The index has 26 constituents with a total market cap of $2.35 trillion, average market cap of $92.5 billion and median market cap of $34.9 billion as of May 16, 2018," said S&P.

Going forward investors need to be able to adapt to the changing market conditions. Historically the telecom sector has been known as a defensive, high yielding dividend sector. Come September that will change. Although there will still be some of the leftover telecom names, there will be just as many high growth, low dividend names as well. This will poise the sector for more growth but also more volatility and risk. Clients will notice that some of their holdings in their portfolio will change sectors. You may also notice some new names being added to your portfolio along with increased transaction activity. The purpose of this activity will be to stay as closely modeled to the benchmark as possible. The new sector is set to be released September 21, 2018.

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