Communication Services Select Sector SPDR Fund (XLC) and Select Sector SPDR Fund Rebalancing - SPDR ETFs
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Communication Services Select
Sector SPDR® Fund (XLC) and
Select Sector SPDR Fund Rebalancing
Frequently Asked Questions
S&P Dow Jones Indices and MSCI announced major changes GICS Structure Change and Effects on Select
to the Global Industry Classification Standard (GICS®) Sector SPDR Funds
structure following their annual review in 2017. Effective
at the close of business on September 21, 2018, the 1. Why rebalance the exposures?
Telecommunication Services sector will be expanded Given that three funds are affected, we will make the
to include selected companies from the Information transition a rebalancing of the exposures.
Technology and Consumer Discretionary sectors and
Through rebalancing, we will leverage our capabilities as
renamed Communication Services. In addition, online
the third largest asset manager in the world: steward of
marketplaces for consumer products and services will
$2.72 trillion in assets,1 more than 25 years of managing
be moved from the Information Technology sector to
ETFs and an experienced global trading desk that
the Consumer Discretionary sector.
executed trades for over $400 billion in global equities
As a result, S&P Dow Jones Indices launched the last year.2 We seek to:
Communication Services Select Sector Index on April
• Mitigate costs and tracking error on the funds, as well
30, 2018. The Technology and Consumer Discretionary
as minimize market disruption.
Select Sector Indices will also be impacted by the GICS
structure changes, resulting in select companies being • Offer shareholders the solutions necessary to obtain
reclassified at the close of business on September 21, 2018. exposure to the full GICS landscape.
See Figure 1 for the areas affected by the GICS sector • Allow investors full control over their own
changes, as well as Appendix A for information on the sector rebalancing.
specific securities moving.
2. W hy are S&P Dow Jones Indices and MSCI changing
As a leading provider and innovator of sector-based the GICS Structure?
solutions, State Street Global Advisors launched the
The Telecommunication Services sector is changing as
Communication Services Select Sector SPDR Fund (XLC)
people have moved away from land lines towards the
on June 19, 2018 to provide full coverage of S&P 500® sectors
internet and new media to communicate, connect and
aligned with the new GICS structure. Additionally, in
access information. Adapting to the industry changes,
accordance with the constituent changes for the existing
telecommunication companies are diversifying into
Information Technology and Consumer Discretionary
internet services, cable, media content and other areas.
sectors, State Street Global Advisors will perform a standard
After consulting with members of the investment
rebalance of the Technology Select Sector SPDR Fund (XLK)
community last year, S&P Dow Jones Indices and MSCI
and the Consumer Discretionary Select Sector SPDR Fund
decided to broaden the sector definition and rename as
(XLY) to reflect the underlying index changes effective at the
the Communication Services Sector to reflect the evolving
close of business on September 21, 2018.
sector landscape.Communication Services Select Sector SPDR® Fund (XLC) and Select Sector SPDR Fund Rebalancing
Frequently Asked Questions
Figure 1: GICS Changes Illustration
Telecommunication
Services
Telecommunication
Services
Industry Group
(e.g., AT&T, Verizon)
Information Communication Consumer
Technology Services Discretionary
Interactive Media & Media
Services Companies (e.g., Comcast, News Corp.,
(e.g., Alphabet, Facebook) Omnicom, CBS Corp.)
Interactive Home Movie & Entertainment
Entertainment Companies Entertainment Companies
(e.g., Activision) (e.g., Netflix, Walt Disney)
Online Marketplaces
(e.g., eBay)
Source: State Street Global Advisors, as of July 31, 2018.
3. How would the Technology and Consumer 5. W hat does the new Communication Services Sector
Discretionary Select Sectors have historically look like now, and what would it have looked like
looked and performed based on the new under these classification rules?
stock classifications? The composition of the new sector reflects a growth
We worked with S&P Global to create a data package oriented exposure with 61% of constituents classified as
showing historical performance and constituent data. “growth” stocks by Morningstar4 as well as the weighted
Please reach out to your SPDR Sales Representative average historical earnings growth rates being higher
or call 866.787.2257 for more detailed information. than the broader market.5
4. W hat will the Technology and Consumer For historical information we worked with S&P Global to
Discretionary Select Sectors look like after create a data package showing historical performance and
the rebalance? constituent data. Please reach out to your SPDR Sales
The changes will not completely remove growth exposure Representative or call 866.787.2257 for more
from the Technology and Consumer Discretionary Select detailed information.
Sectors, as they will still have a higher allocation to
growth stocks than the broader market post rebalancing.3
Please reach out to your SPDR Sales Representative or call
866.787.2257 for more detailed information.
State Street Global Advisors 2Communication Services Select Sector SPDR® Fund (XLC) and Select Sector SPDR Fund Rebalancing
Frequently Asked Questions
6. W hat information is available for investors to Consensus Long-Term Growth (LTG) expectations of
understand the impact of the changes on the stocks in Communication Services are the third highest
sector landscape? in new sector landscape and above the broader market.6
We have published materials including an infographic, If investors do hold XLK and XLY, to align sector
blog posts, and an in-depth research article, “GICS exposures to the S&P 500 sector market cap weight after
Sector Structure Changes: What Do They Mean the GICS structure changes, they may need to reduce
for Investors,” to explore the potential impact on their positions by around 25% and 22% respectively
sector fundamentals and sector investing. It is all and use the proceeds to add the Communication
available on spdrs.com. If you have further questions Services sector. Failing to rebalance the portfolio will
about the upcoming GICS sector changes and its impact result in active industry risks and stock specific risks
on sector investing, please reach out to your SPDR by overweighting stocks staying in the Tech (e.g. Apple
Sales Representative or call 866.787.2257 for more and Microsoft) and Cons. Disc. (e.g. Home Depot and
detailed information. McDonald’s) while having no exposures to stocks that
7. How will these changes impact the Select Sector are moving to Communication Services.(e.g. Facebook
SPDR® Fund suite? and Google).
To keep the Select Sector SPDR suite aligned with the new 10. How will the GICS structure changes impact the
GICS structure, we launched the Communication Services SPDR Industry ETF lineup?
Select Sector SPDR Fund (XLC) on June 19, 2018. XLC Based on the most current information available, the
seeks to provide an effective representation of the SPDR S&P Software & Services ETF (XSW), the SPDR
Communication Services sector of the S&P 500 Index S&P Internet ETF (XWEB) and the SPDR Retail ETF
by tracking the new Communication Services Select (XRT) will undergo a standard rebalance when their
Sector Index. respective index (the S&P Software & Services Select
The existing Technology Select Sector SPDR Fund (XLK) Industry Index, the S&P Internet Select Industry Index
and the Consumer Discretionary Select Sector SPDR and the S&P Retail Select Industry Index) changes take
Fund (XLY) will continue following their respective place at the close of business on September 21, 2018. We
indices, which will reflect the announced security are not expecting any changes to the index constituents
reclassifications by S&P Dow Jones Indices and MSCI of the benchmark of the SPDR Telecom ETF (XTL),
after the rebalancing occurs. but existing Telecom names will be reclassified as
Communication Services at the sector level
8. W hy did you launch XLC before the effective date after September 21, 2018.
of the new Communication Services GICS Sector?
Introducing XLC in June has provided investors with Please reach out to your SPDR Sales Representative
access to the Communication Services sector, helping or call 866.787.2257 for more detailed information.
them prepare for the upcoming GICS changes through the 11. W hy not convert the SPDR S&P Telecom
ability to perform due diligence on the fund, investment ETF (XTL)?
objective and established trading history prior to the XTL tracks the S&P Telecom Select Industry Index
realignment in September 2018. comprised of telecommunications companies within
9. W hat are potential implications for investors’ the S&P TMI universe, covering mid and small-cap
sector portfolios after the changes effective on securities and providing little overlap with the new
September 21, 2018? large cap Communication Services sector.
If investors do not hold technology or consumer 12. What is the expense ratio of XLC?
discretionary positions and are looking to add a growth- The expense ratio of XLC is capped so as not to
oriented allocation to portfolios, XLC may be a useful exceed 0.1345% to align with the gross expense
position to add to portfolios. As shown in Appendix A, ratio of all other Select Sector SPDR Funds.
some of the securities involved in this reclassification are
well-known firms with lines of business fueling secular
shifts towards a more inter-connected world through
innovative technological advancements, ultimately
providing future growth opportunities.
State Street Global Advisors 3Communication Services Select Sector SPDR® Fund (XLC) and Select Sector SPDR Fund Rebalancing
Frequently Asked Questions
Select Sector SPDR Rebalance and 4. Rather than rebalancing when the reclassifications
became effective, why didn’t you seek to track
Impact Information
transition indices over a period of months?
1. How will the fund manager effect the rebalance of Seeking to track transition indices that periodically
XLK and XLY? rebalance would result in our Information Technology
XLK and XLY are expected to rebalance their respective and Consumer Discretionary Select Sector Funds not
portfolios on or around September 21, 2018, leveraging adhering to any current GICS classification. This would
State Street Global Advisors’ equity execution expertise create misweights to systemically important names,
and more than 25 years of experience managing ETFs, creating potential tracking error for investors seeking
aiming to minimize transaction costs, tracking error to manage pure sector exposures.
and market impact.
For example, tracking error could be caused by selling a
2. W hat is the expected tax impact? stock like Netflix, the third largest holding in the current
The rebalance is not expected to result in capital gain Consumer Discretionary sector and the best performing
distributions to existing shareholders of the fund. stock in the S&P 500 in 2018, before the exposure change.7
Although unlikely, if there are any resulting capital gain
By rebalancing on a single date we are seeking to
distribution requirements, estimates will be provided in
mitigate costs where possible, and tracking error is
early November.
a cost to investors, while providing precise sector
3. W hy didn’t you distribute XLC through a special exposures through and beyond the transition.
distribution of XLK and XLY similar to the XLF
5. How will the rebalance affect Net Asset Value,
distribution of XLRE?
total net assets, or shares outstanding of XLK,
The constituents of the new index, which XLC seeks to XLY, and XLC?
track, draw from both XLK and XLY. A distribution from
We do not anticipate any operational impact to Net Asset
multiple funds would result in complex transactions,
Value, total net assets, or shares outstanding of these
potentially leading to uncertainty in fund exposure as
three funds as a result of the rebalance.
well as confusion about fund pricing and tracking error
for market participants and clients. 6. What is the expected turnover of XLY and XLK?
Additionally, if shareholders of XLK were to receive a The expected one-way turnover of XLY and XLK is
distribution of XLC, the weighted composition of XLC estimated to be around 23% and 27%, respectively.
could differ materially from the client’s existing holdings, We will continue to provide information with respect
causing an unintended exposure (e.g., they would have to share amounts and taxation once available. Please
exposure to legacy Consumer Discretionary stocks where reach out to your SPDR Sales Representative or call
previously they did not). Ultimately, rebalancing XLK 866.787.2257 for more detailed information.
and XLY independently allows shareholders to have
full control of their desired exposure and any potential
tax consequences.
State Street Global Advisors 4Communication Services Select Sector SPDR® Fund (XLC) and Select Sector SPDR Fund Rebalancing
Frequently Asked Questions
Appendix A: List of Impacted Constituents of Consumer Discretionary Select
Sector and Technology Select Sector Indices
Weight in the Current
Select Sector Index (%)
Ticker Name as of 07/31/2018 Current Industry Group Current Sub-Industry
From Consumer Discretionary Select Sector Index to Communication Services Select Sector Index
OMC Omnicom Group Inc 0.52 Media Advertising
IPG Interpublic Group of Cos Inc/The 0.29 Media Advertising
CBS CBS Corp 0.59 Media Broadcasting
DISCK Discovery Communications Inc — Class C 0.28 Media Broadcasting
DISCA Discovery Communications Inc — Class A 0.14 Media Broadcasting
CMCSA Comcast Corp 5.43 Media Cable & Satellite
CHTR Charter Communications Inc 1.86 Media Cable & Satellite
DISH DISH Network Corp 0.24 Media Cable & Satellite
DIS Walt Disney Co/The 5.58 Media Movies & Entertainment
FOXA Twenty-First Century Fox Inc — Class A 1.57 Media Movies & Entertainment
FOX Twenty-First Century Fox Inc — Class B 0.64 Media Movies & Entertainment
VIAB Viacom Inc 0.34 Media Movies & Entertainment
NWSA News Corp — Class A 0.19 Media Publishing
NWS News Corp — Class B 0.06 Media Publishing
NFLX Netflix Inc 4.85 Retailing Internet & Direct Marketing Retail
TRIP TripAdvisor Inc 0.21 Retailing Internet & Direct Marketing Retail
Total Weight 22.77
Total Number of Securities 16
From Technology Select Sector Index to Communication Services Select Sector Index
ATVI Activision Blizzard Inc 0.85 Software & Services Home Entertainment Software
EA Electronic Arts Inc 0.60 Software & Services Home Entertainment Software
TTWO TAKE-TWO INTERACTIVE SOFTWRE 0.20 Software & Services Home Entertainment Software
FB Facebook Inc 6.31 Software & Services Internet Software & Services
GOOG Alphabet Inc — Class C 5.63 Software & Services Internet Software & Services
GOOGL Alphabet Inc — Class A 5.58 Software & Services Internet Software & Services
TWTR Twitter Inc 0.32 Software & Services Internet Software & Services
VZ VERIZON COMMUNICATIONS INC 3.25 Telecommunication Services Telecommunication Services
T AT&T INC 3.54 Telecommunication Services Telecommunication Services
CTL CENTURYLINK INC 0.28 Telecommunication Services Telecommunication Services
Total Weight 26.56
Total Number of Securities 10
From Technology Select Sector Index to Consumer Discretionary Select Sector Index
EBAY eBay Inc 0.47 Software & Services Internet Software & Services
Source: S&P Dow Jones Indices, as of 07/31/2018.
State Street Global Advisors 5Communication Services Select Sector SPDR® Fund (XLC) and Select Sector SPDR Fund Rebalancing
Frequently Asked Questions
1
Source: State Street Global Advisors, 06/30/2018. Glossary
2
Source: State Street Global Advisors, as of 12/31/2017. GICS, or Global Industry Classification Standard A financial-industry guide for
3
Source: Morningstar, as of 07/31/2018. classifying industries that is used by investors around the world.
4
Source: Morningstar, as of 07/31/2018. S&P 500 Index A popular benchmark for U.S. large-cap equities that includes 500
5
Source: FactSet, as of 07/31/2018. companies from leading industries and captures approximately 80% coverage of
6
Source: FactSet, as of 05/31/2018 available market capitalization.
7
Source: Bloomberg Finance L.P., as of 09/05/2018.
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