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GICS changes have significant effect on technology ETFs

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Friday saw the formal reclassification of some of the most powerful US technology and telecoms companies as the Global Industry Classification Standard (GICS) framework sees the technology sector lose many of its biggest players to a new communications services sector.

The changes will impact some 1,100 companies including powerful names such as Facebook, Twitter and Alphabet, who will move into the new sector for GICS constructed indices, and on the ETFs that are linked to them.           
 
Daniel Prince (pictured), Head of iShares Product Consulting at BlackRock, explains that this is one of the biggest changes in the way companies are classified.
 
“It is very important to understand that what is happening will impact the holdings for sector level ETFs that track this particular GICS methodology,” he says. 
 
This means that many of the larger technology ETFs in the US are being impacted.
 
“For BlackRock, our iShares line-up is largely unaffected by these changes and we have options for different investors with one technology ETF that is changing, and one that isn’t,” Prince says.
 
Prince believes that the GICS reclassification increases choices for investors. “Because an ETF says technology on the front, doesn’t mean it holds the same things,” Prince says. “There is lots of variety and choice in the ETF landscape so you need to do your homework on the different indices.”
Prince says that most funds that track the indices affected by the changes have already rebalanced their portfolios earlier this month.
 
“This event has been well telegraphed,” he says. “And if you don’t invest at a sector level, and instead you use broad US market ETFs, there are no changes for you.”

While many sector ETFs will undergo significant adjustments, iShares’ lineup will remain largely unchanged. Its US Technology ETF, IYW, for example, does not track GICS so no changes have occurred and the ETF still includes Google, Facebook, Apple and Microsoft. 

Two other iShares technology ETFs, iShares North American Tech ETF (IGM) and iShares North American Tech-Software ETF (IGV), will also be largely unchanged, and Prince notes that IGM will still maintain exposure to FAANG stocks. 
 
“Our message to clients that have been asking is to understand which ETFs are changing and how that will be different going forward.”
 
The GICS changes reflect a significant shift in the overall classification methodology for how technology companies will now be included within the new communications services sector.

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