Facebook, Inc.'s (FB) decline this morning following reports of Instagram's executive departures is putting a damper on the newly minted S&P Communication Services Select Sector Index.
Facebook stock is falling about 0.6% as of 11:19 a.m. in New York as news of Instagram founders Kevin Systrom and Mike Krieger leaving the company has taken analysts and investors by surprise.
The downturn appears to have transferred over to the recently created S&P Communications Select Sector, which is falling by about 0.1%.
The slide is notable, as the weighting that Facebook occupies in the index is already showing its ability to move the nascent index. Even significant drops in sector components like Comcast yesterday could not bring the index, but even a slight drop in Facebook is proving material.
Starting Up the Sector
The new sector moved Action Alerts Plus holding Facebook, Inc. (FB) along with compatriots Twitter, Inc. (TWTR) , Alphabet, Inc. (GOOG) from the technology index to the new Global Industry Classification Standard (GICS) created sector.
The move was necessitated by the rapid growth mega-cap tech names like Facebook have seen in recent years.
The giant companies have caused the technology sector they reside in to make up more than 25% of the overall S&P 500 index, meaning too much risk weighting for index makers.
In order to alleviate the risk, the new sector will look to trim the technology secotr's weight for the S&P to around 20%. Also, for the newly created sector, Comcast Corporation (CMCSA) , AT&T (T) , Verizon (VZ) , and Walt Disney Co. (DIS) were added on top of the famous FANG names in Facebook, Netflix (NFLX) , and Alphabet to allow for sector diversification.
Volume, Not Volatility
Trade volume on the sector has been expectedly extremely high, as this shift marks the largest rebalancing of all time.
According to NASDAQ data, trading volume spiked on Monday, with 3.3 million shares of the State Street-managed XLC ETF in motion on Monday and remaining above the 1 million mark today. The ETF directly tracks the new communications sector and has been traded in anticipation of the sector change since July.
The average three-month trading volume for the ETF is around 600,000.
As Real Money contributor James DePorre noted on Friday, major funds have been required to lumber their billions of dollars around in order to align with the new indices as needed. This has caused the large scale volume trade.
To be sure, DePorre noted that the unusual action should not be blamed for moves in these stocks in the short term and should be ignored by investors.
"It is meaningless in the bigger scheme of things," he wrote on Friday. "Don't' be misled by what is occurring."
On the smaller scale, the volume appears to have been digested by the market adequately, vindicating DePorre's call for calm.
While investors may be advised to ignore the volume, they cannot ignore Facebook.