A Famous Movie Line and Communication Sector ETFs

Technology investing changed in 2018, when S&P created the communications sector. That turned the 10 sector slices of the S&P 500 into 11. Or, as in line from the iconic heavy metal mockumentary “This is Spinal Tap," S&P took its 10 sectors and decided, “this one goes to 11.”  

And thus, the communications sector was created. It includes diversified telecom services stocks and wireless telecommunication companies, as well as media, entertainment and interactive media businesses.  

That communications segment of the stock market caused some big-time stocks from the tech sector to change teams. The same was true for some consumer discretionary icons. Six years later, since the date of the “spinoff” into that new sector, the dominant ETF in the category, the Communications Services Select Sector SPDR ETF (XLC), an $18 billion fund, has gained 77%.  

That move has been largely in sync with that of the consumer discretionary sector that some of the big communications stocks exited. As advisors and investors know, the technology sector has dominated everything during that time, more than tripling. Yet as is the case with many S&P sectors after that historic run by tech, within each sector, the door may have been opened for advisors to attack this sector by looking beyond the “usual suspects.”

RSPC, XTL: Other Communication Sector ETFs 

Here’s why. In XLC, two stocks (Meta Platforms and Alphabet) make up 44% of assets. Those two members of the “Magnificent Seven” set have rendered most of the rest of the sector less relevant. They don’t pay much dividend yield (around half of one percent for each), and that means that the other part of this sector, which includes old “baby bell” telecom companies like Verizon, AT&T along with younger companies like Electronic Arts and Netflix, may be lost in the shadows of the “big two” here.

As such, researching other ways to allocate to communications via ETFs makes sense for advisors. At a time when the advisory business is long on competition and short on differentiation, these deeper dives into “under the radar” ETFs can be an advantage to a firm’s brand, especially for boutique advisory outfits. I speak from experience there, since I used to be one.

One way to dig deeper here is to simply neutralize the weightings of this lopsided sector via the $60 million Invesco S&P 500 Equal Weight Communication Services ETF (RSPC), which has only earned one-third the return of XLC since their common inception, only around 30% in total since late 2018. 

To some, that’s a reason to pass and stick with what has worked. But for others, this could be part of a bigger trend change from mega caps to simply larger stocks that are not the very largest in their sectors. And for those who want to isolate on stocks in this sector that are more traditional telecom stocks, the $70 million SPDR S&P Telecom ETF (XTL) is an equal-weighted fund whose portfolio sells for under 15 times trailing 12-month earnings.

Advisors: For Clients, Communication is Everything

Communication means everything to financial advisors. It is a differentiator in maintaining, growing and attracting client relationships. Perhaps that can also be said about the effort they put into dissecting the modern version of communications equity investing, via ETFs that provide access to that sector in different ways.