Tech Funds Car­ry On Wi­thout Big Names

L'Opinion - - The Wall Street & I'Opinion - As­jy­lyn Lo­der

Fa­ce­book Inc., Twit­ter Inc. and Google parent Al­pha­bet Inc. of­fi­cial­ly left the S&P 500’s tech­no­lo­gy sec­tor last month, but in­ves­tors ap­pear to be in no hur­ry to fol­low them.

In­ves­tors have been slow to pull their mo­ney from po­pu­lar tech­no­lo­gy ex­change-tra­ded funds even though those funds no lon­ger in­vest in a hand­ful of the com­pa­nies that have been sy­no­ny­mous with the rise of tech in U.S. mar­kets.

State Street’s $22.8 bil­lion Tech­no­lo­gy Se­lect Sec­tor SPDR ETF li­qui­da­ted its hol­dings of Fa­ce­book, Twit­ter and Al­pha­bet two weeks ago, while the $22.6 bil­lion Van­guard In­for­ma­tion Tech­no­lo­gy ETF sold off the shares gra­dual­ly 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 stocks’ de­par­ture from the tech sec­tor fol­lo­wed changes to a wi­de­ly used sys­tem that or­ga­nizes com­pa­nies ba­sed on where they fit in the glo­bal eco­no­my. Com­pu­ter giants like Apple Inc. and Mi­cro­soft Corp., along with chip­ma­ker In­tel Corp. and net­wor­king giant Cis­co Sys­tems Inc., are among the big­gest com­pa­nies that still re­side in the tech sec­tor.

Re­mo­ving Fa­ce­book and Al­pha­bet is like tra­ding away two of the best players on a bas­ket­ball team, said Mat­thew Bar­to­li­ni, head of SPDR Ame­ri­cas re­search at State Street Glo­bal Ad­vi­sors.

So far, the re­mai­ning tech stocks have done well, but Mr. Bar­to­li­ni said in­ves­tors who don’t re­ba­lance their port­fo­lios are ta­king a risk that their per­for­mance will veer wi­de­ly from the new bench­mark, es­pe­cial­ly if there’s a big mar­ket move. That could be a pro­blem for ad­vi­sers and ins­ti­tu­tio­nal mo­ney ma­na­gers who aim to meet or beat the per­for­mance of the mar­ket.

The risk is even grea­ter with the ap­proach of ear­nings sea­son, of­ten a key ca­ta­lyst for out­size gains and losses. Twit­ter’s se­cond-quar­ter re­sults, for example, sent its stock price tum­bling more than 20 % on Ju­ly 27. Fa­ce­book, Twit­ter and Al­pha­bet re­port re­sults la­ter this month.

“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,” Mr. Bar­to­li­ni said.

The changes were promp­ted by the most si­gni­fi­cant ove­rhaul of the Glo­bal In­dus­try Clas­si­fi­ca­tion Stan­dard, or GICS, since it was crea­ted in 1999 by in­dex pro­vi­ders MSCI Inc. and S&P Dow Jones In­dices. The sys­tem sorts more than 46,000 se­cu­ri­ties world-wide in­to 11 dif­ferent sec­tors, which are then fur­ther sub­di­vi­ded in­to in­dus­tries and sub­in­dus­tries.

The changes af­fec­ted hun­dreds of in­dexes from both pro­vi­ders, in­clu­ding 23 com­pa­nies in the S&P 500 alone. Fa­ce­book, Twit­ter and Al­pha­bet were mo­ved out of tech to a new “com­mu­ni­ca­tions ser­vices” group that re­pla­ced the for­mer te­le­com group. Net­flix Inc., Walt Dis­ney Co. and others were ta­ken from “consu­mer dis­cre­tio­na­ry” and li­ke­wise mo­ved to the new com­mu­ni­ca­tions sec­tor.

As a re­sult, State Street’s tech ETF last month li­qui­da­ted 9.2 mil­lion shares of Fa­ce­book worth $1.5 bil­lion and 2.3 mil­lion shares of Al­pha­bet va­lued at $2.7 bil­lion. On the same day, the $15.2 bil­lion Consu­mer Dis­cre­tio­na­ry Se­lect SPDR ETF sold 8.5 mil­lion shares of Dis­ney and 2.5 mil­lion shares of Net­flix, worth a com­bi­ned $1.8 bil­lion.

In­ves­tors’ de­lay in chan­ging their port­fo­lios may stem from re­luc­tance by as­set ma­na­gers to sell the tech ETF at a pro­fit, which could re­sult in taxable gains for their clients. Others may want to avoid a stam­pede and ins­tead re­ba­lance gra­dual­ly.

There are si­gns that in­ves­tors are be­gin­ning to read­just. State Street’s Consu­mer Dis­cre­tio­na­ry Se­lect Sec­tor SPDR, which sold Net­flix, Dis­ney and others, saw $582 mil­lion in out­flows in Mon­day through Thurs­day of last week . The new Com­mu­ni­ca­tions Ser­vices Se­lect Sec­tor SPDR ETF, which laun­ched in June to give in­ves­tors time to shift to the new sec­tor, has pi­cked up al­most $2 bil­lion in new as­sets since the start of the month, ma­king it one of the most suc­cess­ful fund launches of the year. Van­guard’s com­pe­ting ETFs are seeing si­mi­lar pat­terns.

“The risk isn’t huge just yet,” Mr. Bar­to­li­ni said. “But eve­ry day they wait, that tra­cking risk is going to get big­ger and big­ger.”

SI­PA PRESS

Twit­ter, Fa­ce­book and Al­pha­bet are no lon­ger in the S&P 500’s tech sec­tor.

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