Big changes to the S&P 500 are taking giant tech stocks down a notch. And that means big changes for ETF investors.
Starting Dec. 20, S&P Dow Jones Indices reconstituted which S&P 500 stocks are considered growth plays versus value — and in what proportion. The results are significant.
Giant tech stocks like Apple and Microsoft are not pure growth stocks anymore based on the new methodology, says Aniket Ullal, analyst at CFRA. That means the technology sector's weight in the S&P 500 Growth Index drops by nearly 10%.
Meanwhile, the share of the financial sector jumps to 11.8% from 5.2%. "Sector changes to growth and value indices can meaningfully impact performance," Ullal said.
Sizing Up The Seismic Changes
Value and growth ETFs are major parts of many investors' portfolios. And changes this big are worth monitoring.
At the end of the year, there were more than $335 billion in ETF assets linked to S&P 500 growth and value indices, Ullal says. Investors looking to invest in growth ETFs might own iShares S&P 500 Growth ETF. Likewise, bets on beaten-up value stocks might flow into iShares S&P 500 Value ETF.
All the stocks in the S&P 500 are in either the growth or value categories. For those stocks that don't fit neatly into either category, they are in both.
Not surprisingly, tech stocks played a big role in the S&P 500 Growth index. Prior to the rebalance, the sector accounted for 49.4% of IVW. It's down to 39.8% after the rebalance, Ullal said.
Big Growth Changes For Tech
And it's no mystery why. Many big tech stocks in the S&P 500 are no longer considered pure growth by the index.
Coming into 2024 all the "Magnificent Seven" stocks were pure growth. S&P allocated all of their market capitalization to the growth index. But that's changed.
Take Apple. The gadget maker used to be all-in on the growth index. Now it's 46% growth and 54% value. Similarly, Microsoft prior to the rebalance was 100% allocated to growth. Now it's 52% growth and 48% value.
Other techs like Advanced Micro Devices, Accenture and Qualcomm are entirely removed from S&P 500 Growth and considered pure value stocks now.
Financials Move In On Growth
Financials are quickly swooping in to fill the growth hole left by technology stocks.
For instance, Warren Buffett's Berkshire Hathaway is considered 49% growth. Prior to the rebalance, the diversified holding company was 100% in the value index. Similarly, JPMorgan Chase now holds a 57% weight in the growth index, up from 0%.
These seemingly small shifts can make a big difference to investors. The tech weight in S&P 500 Growth also fell going into 2023. So amid a tech rally that year, indexes linked to S&P 500 Growth lagged other growth ETFs with higher tech exposures.
The S&P 500 Growth index rose 26% during 2023. That trailed the roughly 40% gain by other growth ETFs that tracked more tech-heavy indexes.
Will S&P 500 growth lag again in 2025? That depends on how tech and financials stocks do during the year. If there's more rotation into financials and away from tech, the reformulated S&P 500 Growth index could outperform.
"Monitoring this will be important for investors that use growth and value ETFs as significant holdings in their portfolios," Ullal said.
Big Shifts In S&P 500 Growth
| Company | Symbol | Old % market cap growth | Old % value | New % growth | New % value |
|---|---|---|---|---|---|
| Apple | AAPL | 100% | 0% | 46% | 54% |
| Microsoft | MSFT | 100% | 0% | 52% | 48% |
| Amazon.com | AMZN | 100% | 0% | 58% | 42% |
| Advanced Micro Devices | AMD | 100% | 0% | 0% | 100% |
| Adobe | ADBE | 100% | 0% | 42% | 58% |
