On this week’s episode of What Are Your Thoughts? Josh and I got into a debate about some potential sector misclassifications. American Express is in financials, but Visa, Mastercard, PayPal and Square (VMAPS) are not.

I don’t want to get into the weeds about whether they belong in financials or technology, I can see the case for both sides. What I want to discuss is how their exclusion has impacted the performance of financial stocks.

Over the last 3 years, XLF is flat while the S&P 500 is up more than 40% over the same time. Woof.

Josh thought that the four stocks would have a huge difference on returns and I didn’t. I was wrong.

We deconstructed XLF and then built it back up to include VMAPS, and there is a wide spread. (We couldn’t get the performance of XLF to line up perfectly, but directionally it tells the story). These four names are over $1 trillion, so they would currently represent more than 25% of the index if they were included.

I’m not so sure VMAPS are improperly classified, but the ramifications of which sector they’re in can be quite significant, as the chart above shows.

Josh and I got into this and much more in our latest episode, check it out below!

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