By: Catherine Yoshimoto, Sr. Index Product Manager
For the first time in over 10 years, the weighting of the financials sector in the FTSE 100® Index fell below that of the consumer goods sector at the end of February, just before quarterly review results were announced. This brief sector rotation made headlines in the UK as it was believed to highlight the struggles that financial services companies have faced since the global financial crisis. But was this just a temporary cyclical shift or a reflection of a longer-term trend?
As illustrated below, the performance breakdown by sector in the FTSE 100 Index over the past 12 months reveals the role that performance played in this rotation. Over this period the consumer goods sector was the highest performer while the financials sector was the penultimate underperformer in the index for the same period. In a market cap weighted index like the FTSE 100, this was certainly a major driver of the recent weighting shift.
FTSE 100 Index 12-month Total Return by Sector, March 1, 2015 to February 29, 2016
In addition to recent sector performance, we can also examine how the longer term FTSE 100 industry weights have shifted over the last 10 years. By examining the index sector weightings from pre-financial crisis in February 2006 to those of 2011 and 2016 we can see whether there has been a temporary or long term trend at work.
The chart below clearly indicates that in the wake of the global financial crisis, the weight of the financials sector had already dropped to its current level in the FTSE 100 by 2011. This 8% decline occurred even while the number of stocks included in the sector was roughly the same. This makes sense when you consider that during this time the total market value of the financials sector declined over 20% compared with an 8% increase for the FTSE 100 as a whole.
FTSE 100 Index – ICB Industry Weights (%)
From 2011 to today, the largest weighting shift has not occurred in financials but is instead seen in the consumer goods, oil & gas and basic materials sectors. The decline in the weight of oil & gas coincides with the steep fall in oil prices. Similarly, the basic materials sector was the hardest hit from a performance perspective which has led to its current weight being about a third of what it was five years ago.
Based on the data over the last 10 years, therefore, it seems that the financials sector weight has remained relatively stable. The recent sector weight rotation simply reflects the performance differential between consumer goods and financials over the past year. While financials’ brief rotation out of the largest sector weight in the FTSE 100 is new, the trend is not – if the weights of financials and consumer goods sectors continue to be fairly even, shifts like the one in February could be the new normal depending on performance of these sectors.
For more information on the FTSE UK Index Series Quarterly Review, click here.
© 2016 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.
FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.
All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.
No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.
No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a license from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.