By Francis Kim, product manager, indexes
A well-constructed industry classification system helps investors and other market participants track the performance and evolution of industries, sectors, sub-sectors and companies. It also enables peer analysis over time. But businesses never stand still, and so the approach needs to adapt to reflect evolving economic activity.
This is why we’re making some changes to the Industry Classification Benchmark (ICB), the official classification system for our equity indexes.
Our Russell US indexes adopted the new framework last September. FTSE equity indexes will transition after markets close on March 19, 2021. New ICB indexes will be effective at the open of March 22 (March 23 for JSE Africa & Namibian indexes). And while all of the changes to the ICB structure are outlined in greater detail in our paper, the following is an overview of the four principal enhancements we’re making, and why we’re making them.
ICB enhancement #1: A standalone Real Estate Industry
The proposal to give Real Estate standalone status recognizes the scale and prominence of this rapidly growing asset class. The new framework provides more detail at the Subsector level, drawing distinctions between real estate services companies and real estate holding and development companies. It also distinguishes between 11 different REITs property types. This refined categorization addresses clients’ need for a high degree of specificity when categorizing and analyzing REITs for investment and in product design.
ICB enhancement #2: Expansion of the Telecommunications Industry
After several issues resonated in feedback from clients and consultants, we recognized the need for a broad reassessment of Telecommunications classification. The primary issue to address was the dramatic transformation of the global telecom industry in recent years, where business lines across media, communications, and content have converged. The new Telecommunications grouping combines traditional telecom services companies with related equipment and cable TV providers, reflecting the evolving investment implications of this convergence.
ICB enhancement #3: A new Consumer Discretionary and Consumer Staples framework
ICB also adopted the Consumer Discretionary and Consumer Staples framework, which was part of the now-retired Russell Global Sectors, in response to the growing trend of separating stocks into cyclical and defensive categories. Our restructuring of consumer stocks into Consumer Discretionary and Consumer Staples classifications draws a finer distinction between the cyclical and noncyclical (or defensive) economic sensitivities and risk/return characteristics of each stock group.
ICB enhancement #4: The Oil and Gas Industry becomes ‘Energy’
The final principal change is the renaming of the Oil and Gas Industry to Energy, under which Subsectors are now grouped as Oil, Gas and Coal or Alternative Energy—capturing the rising prominence of energy alternatives to fossil fuels. The ICB Coal Subsector has also been added from the Basic Materials industry, and we’ve expanded ICB Subsector groupings in this industry to differentiate their business activities.
As summarized below, the result of these changes is an increase in the number of groupings across the four levels of ICB classification (Industry, Supersector, Sector, and Subsector). At the Industry and Supersector levels, there’s an increase of one grouping, and at the Sector level there’s an increase of four groupings. Additionally, there are 59 new Subsectors; Consumer Digital Services, Financial Data Providers, Transaction Service Providers, and Cannabis Producers are the are most notable Subsector changes.
What isn’t changing: ICB robust governance process
We employ a robust governance framework to approve new indexes and methodology changes for existing indexes, and the development and review of enhancements to ICB follows the same diligent standards.
The changes to ICB have also been supported by a public consultation with senior investment professionals, traders, index providers and analysts from around the world, all with deep technical expertise.
These enhancements were designed to address the investing demands of an ever-changing global equity market and to accommodate future changes as ICB continues to expand beyond its current coverage. The added specificity provides greater flexibility for portfolio management and strategy and helps identify new investment opportunities.
The new, enhanced structure adds granularity to reflect the evolution of the global economy—and to better address the needs of today’s investment professionals.
ICB extends well beyond equity index coverage. It classifies over 82,000 securities across 139 exchanges to provide a universal view of the entire global equity landscape
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