Last year, index providers MSCI and Standard & Poor’s announced the telecommunications sectors would be renamed communications services and would add companies from the consumer discretionary and technology sectors.
The communication services sector officially debuts later this month, potentially putting the Communication Services Select Sector SPDR Fund (NYSEArca:XLC) in the spotlight.
XLC is the first ETF dedicated to the new communication services sector. The new ETF tracks the Communication Services Select Sector Index and “seeks to provide precise exposure to companies from the media, retailing, and software & services industries in the U.S.,” according to State Street Global Advisors (SsgA).
XLC, which debuted in June, has $523.76 million in assets under management, making it one of the most successful ETFs to debut this year. XLC is home to some of the big-name stocks that, until the reconfiguration of communication services, previously resided in the consumer discretionary and technology sectors.
“The massive scope of this reclassification has the potential to disrupt portfolios if sector investors fail to prepare,” said SSgA in a recent note. “Portfolios that are not re-weighted could become overweight certain stocks while completely lacking some of the most well-known and profitable companies in the world. The result would be a complete mismatch of exposures that could introduce unexpected tracking error and risk into sector-related portfolios.”
Heavy Hitters
Since the communication services sector is not a new sector (it is a new take on telecommunications), XLC features exposure to traditional telecom companies such as Verizon Communications Inc. (NYSE: VZ) and AT&T Inc. (NYSE: T). However, the fund is heavily allocated to faster-growing companies.
For example, Google parent Alphabet Inc. (NASDAQ: GOOGL) and Facebook Inc. (NASDAQ: FB) combine for almost 43% of XLC’s weight. In other words, traditional technology ETFs will no longer be home to Alphabet and Facebook. Likewise, traditional consumer discretionary ETFs will see Netflix, Inc. (NASDAQ: NFLX) and Walt Disney Co. (NYSE: DIS), among others, depart to the communication services sector.
“While the result of rebalancing on sector exposure may not be astonishing, the effect beneath the surface is where this shake-up becomes interesting, especially when you look at it from a risk model or underlying holdings perspective,” said SSgA.
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