An overhaul of Wall Street’s technology and media sectors will coincide with the quarterly expiration of futures and options, potentially bringing a burst of volume and volatility to trading on Friday and the days that follow.
After the close on Friday, S&P Dow Jones Indices will reorganize several of its sectors and relaunch its telecommunications index as a new communication services sector.
The reorganization by S&P and MSCI of the Global Industry Classification Standard is expected to involve S&P 500 heavyweights like Facebook Inc, Amazon.com Inc., Netflix Inc and Google parent Alphabet Inc, which will drastically alter the weightings of some sectors.
The telecom sector, currently about 2 per cent of the entire S&P 500, is expected to have a roughly 11 per cent weighting under its new communication services tag. Technology , with a roughly 26 per cent weighting, is expected to fall to about 20 per cent. Consumer discretionary is likely to drop from 13 per cent to about 11 per cent.
On top of the index reshuffling and “quadruple witching” expirations, S&P will also be implementing the quarterly rebalancing of its indexes.
“Trading related to the index shift could generate $30 billion of market activity, but it also comes on a day busy with other activity, including a quarterly refresh of S&P indexes,” said Matthew Bartolini, the head of SPDR Americas research at State Street Global Advisors.
Apple Inc, eBay Inc, Comcast Corp and Walt Disney Co are among stocks that could see the most activity.
EBay is being moved from the technology into the consumer discretionary sector, which will result in fund managers needing to buy more than 2.7 million shares in the online marketplace, according to ITG.
“The assets associated with the information technology ETF are greater, so this is actually a net positive for eBay in that fund managers will have to buy more shares than they will have to sell,” said Ivan Cajic, head of index research at ITG in New York.
“It will be a net positive demand for eBay.”
Apple is expected to remain in the tech sector but will see its share float fall about 5 percent due to Berkshire Hathaway’s growing position in the iPhone maker. ITG expects fund managers will need to sell more than 39 million shares due to the smaller float.
Some strategists expect the sector changes to cause little disruption to the market because money managers have had a long time to prepare. S&P Dow Jones Indices announced the overhaul in November 2017.
“It has been well, well publicized that they were doing this, so it should not create all kinds of drama,” said Ken Polcari, director of the NYSE floor division at O’Neil Securities in New York.
“You could have a bunch of volatility, but it is going to be more about the quad witch.”
Others said reshuffling by exchange-traded funds (ETFs) that are actively managed may result in higher volatility as managers rotate money to new areas.
Those in charge of actively managed funds could be adjusting positions for weeks following the sector changes, said Steven DeSanctis, equity strategist at Jefferies in New York.
“At the end of the day, large-cap growth managers are going to be really overweight communications services,” he said.
“That has some potential to cause some interesting swings over the next several weeks,” DeSanctis said. “A lot of investment managers try to keep their sector weights within a certain boundary plus or minus a couple of hundred basis points.”