The communication services sector is now a year old and due in large part to some well-known components, the sector has been widely embraced by investors. For example, the Communication Services Select Sector SPDR Fund (NYSEArca: XLC), the first and largest ETF targeting sector, today has $6.04 billion in assets under management.
XLC follows 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.
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.
“A year ago, the Global Industry Classification Standard® (GICS®) replaced the old Telecommunication Services sector with a new Communication Services sector, which combined telecom with some companies that had formerly been classified in the Information Technology and Consumer Discretionary sectors,” according to S&P Dow Jones Indices. “As a result, Telecommunication Services, once the ugly duckling comprising three stodgy phone companies, metamorphosed into a sector that included high-growth companies such as Alphabet, Facebook, and Netflix.”
Impressive Performance
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 42% 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 sector has been more volatile than the broader market, it has doubled the S&P 500’s returns over the past 12 months.
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“Communication Services’ average volatility (19.25%) is only slightly higher than that of Telecommunication Services (17.65%), and this increase came at a time when the S&P 500 overall was much more volatile. As predicted, Communication Services has higher average dispersion and much lower correlations than did Telecommunication Services,” according to S&P Dow Jones.
XLC rivals include the Vanguard Communication Services (NYSEArca: VOX) and the Fidelity MSCI Communication Services ETF (NYSEArca: FCOM).
For more information on the communications sector, visit our communication services category.