Even high-quality growth stocks such as Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOG, NASDAQ: GOOGL) are being discounted due to the coronavirus pandemic’s effect on equity markets. The bright spot there is opportunity is arriving with ETFs including the Communication Services Select Sector SPDR Fund (NYSEArca: XLC).
XLC, the oldest and largest communication services ETF, seeks to correspond generally to the price and yield performance of publicly traded equity securities of companies in the Communication Services Select Sector Index. The index includes companies that have been identified as Communication Services companies by the GICS®, including securities of companies from the following industries: diversified telecommunication services; wireless telecommunication services; media; entertainment; and interactive media & services.
One reason to embrace XLC in the current climate is its exposure to companies levered to the stay at home theme. For example, the fund has one of the largest weights to Netflix (NASDAQ: NFLX), a stock that’s benefiting from consumers’ increasing demands for at-home entertainment.
But Wait, There’s More
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.
Fortunately, those high-yielding stocks, which are under some dividend scrutiny by some market observers, don’t dominate XLC. Rather, cash-rich Facebook and Alphabet do.
In fact, Alphabet and Facebook, which combine for over 40% of XLC’s roster, have two of the largest cash hoards among all S&P 500 companies.
“At the end of 2019, the Alphabet had $119.67 billion in cash on hand, while Facebook had $54.85 billion. In volatile times, cash can be a buffer and it’s a quality trait at a time when investors are eagerly embracing quality stocks,” according to InvestorPlace. “For those considering XLC, it’s clear the ETF is home to some cash-rich companies and none of its marquee holdings will be asking Uncle Sam for a bailout anytime soon.”
Investors remain enthusiastic about XLC as highlighted by year-to-date inflows of $1.14 billion. The fund charges 0.13% per year, or $13 on a $10,000 investment.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.