GICS changes will affect the Big Fintech ETF

Following the close of US markets on March 17, MSCI and S&P Dow Jones – the largest providers of indices for use by exchange-traded funds – will implement changes to the Global Industry Classification Standard (GICS).

For advisers and investors out there who aren’t index geeks, GICS changes mean a selection of stocks will change sectors. These adjustments abound when it comes to companies moving into financial services from technology, including the sector composition of fintech ETFs such as ARK Fintech Innovation ETF (ARKF).

The changes will reduce the value sentiment of the financial sector, giving the group a more growth-oriented style with entries Block (NYSE: SQ ), Mastercard (NYSE: MA ), PayPal (NASDAQ: PYPL ) and Dow component Visa (NYSE: V ), among others .

“Most affected sectors will see limited change in valuation multiples following the change, with the exception of financials – where forward P/E will rise 9% from 13.3x to 14.5x. The 8 S&P 500 stocks moving to financials from Tech ( payment stocks) currently trade at a forward P/E of 22x, 60% above the current financial sector P/E, and they would represent 19% of the sector.” noted Bank of America.

As for ARKF, the fund is actively managed, so it is not limited at sector level. At the end of last year, shares in technology and financial services accounted for 77% of ARKF’s weight, according to issuer data. It is possible that the percentage will be comparable after the GICS changes, but with a haircut to the weight of technology within ARKF and an increased percentage of the holding of financial services.

Take the case of Block (NYSE: SQ ). The company behind the digital wallet Cash App and the Square sales systems is ARKF’s second largest shareholder with a weight of 10.54% as of 2 March. The stock is currently a technology name, but it is migrating to the financial sector.

Toast (TOST), which provides point-of-sale services to the restaurant industry, is another example of a company that currently lives in the technology sector and is moving into the financial sector. That share makes up 3.35% of the ARKF portfolio.

Another byproduct of the big technology-to-financials movement is that active fund managers and hedge funds have long gone from being underweight to overweight financial stocks.

“The biggest implications of the GICS change for fund manager positioning are in financials and technology – both LOs and HFs will move from being underweight financials to overweight financials due to the funds’ high relative weights in sector-changing payment stocks, and technology will go from an equal weight to an underweight of LOs and will see its underweight deepened by HF, Bank of America concluded.

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