One of Monday’s biggest headlines pertains to Elon Musk taking a 9.2% stake in social media giant Twitter (NYSE:TWTR).
It remains to be seen exactly what Musk’s plans are for that investment, which appears passive for now. Nonetheless, the news initiated a major rally in Twitter stock, benefiting a slew of exchange traded funds in the process.
Put the Invesco S&P 500 Equal Weight Communication Services ETF (EWCO) on that list. Entering Monday, EWCO had a 4.85% weight to Twitter, making the stock the ETF’s third-largest holding. On the back of the Musk news, Twitter’s weight in the equal-weight Invesco fund vaulted to north of 6% in midday trading yesterday. Bottom line: On a percentage basis, EWCO is one of the largest ETF holders of Twitter stock.
“While we are not sure about Musk’s intentions–whether he will increase his stake, become an active shareholder, and/or demand a seat on the firm’s board–we believe his communication to the firm, other shareholders, and the platform’s 217 million daily active users could affect Twitter’s long-term strategy,” according to Morningstar.
Recently, Musk took to Twitter, teasing the idea of an alternative platform. It’s safe to say that this particular bet is probably off for the time being.
Getting back to the ETF impact, as of midday Monday, just two ETFs had larger Twitter allocations than did EWCO.
That underscores an important point about equal-weight sector ETFs: While one of the primary aims of equal-weight ETFs is to reduce concentration risk, it’s possible that some equal-weight sector funds will have large weights to a small number of stocks.
EWCO’s top 10 holdings combine for north of 46% of the fund’s roster. However, that’s markedly less concentrated than the cap-weighted version of the S&P 500 Communication Services Index, which devotes more than 42% of its weight to Meta Platforms (NASDAQ:FB) and the two share classes of Alphabet stock.
Put it this way: Meta alone accounts for almost 20% of that cap-weighted index, while EWCO’s largest holding entering Monday — online dating giant Match Group (NASDAQ:MTCH) — represented just 5% of the Invesco fund’s roster.
EWCO, which launched in November 2018, holds 28 stocks.
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