ETF Of The Week: Facebook Deflates 'XLC'

Welcome to ETF of the Week, a designation given to the most newsworthy or notable fund of the past seven days.

In the end, it wasn't Russian hackers or data leaks that toppled Facebook's stock price, but something more mundane: a quarterly earnings miss. 

On Thursday, Facebook's stock price collapsed, falling almost 20% as of Thursday afternoon, after the company missed revenue and earnings targets and reported disappointing growth in global daily active users.

Facebook's plunge also dragged other stocks in the tech sector lower on Thursday, including Netflix, Alphabet and Twitter.

All of those stocks and more appear in State Street Global Advisors' newly launched sector fund, the $288 million Communications Services Select Sector SPDR Fund (XLC) (read: "State Street Launches New Sector ETF").

New Sector Heavy In FAANG

Launched in June, XLC was created in response to this year's changes in the Global Industry Classification Standard, the sector benchmarking system used by many indexers to classify thousands of stocks worldwide.

Starting in September, the current telecom sector will broaden into a new "communications services" sector that includes several FAANG stocks, including Facebook, Alphabet, Amazon and Netflix (read: "Changes Ahead For 24 Sector ETFs").

According to our ETF Stock Finder tool, 204 ETFs currently hold more than 140 million shares of Facebook. But none hold a higher percentage than XLC, which boasts a 22% allocation to the company.

XLC also holds 24% of its portfolio in Alphabet, 4% in Netflix and 3% in Twitter.

As such, XLC has been uniquely harmed by the tech plunge. By Thursday afternoon, XLC fell 4.1%, whereas the Invesco QQQ Trust (QQQ), which tracks many of the same tech stocks, fell 1.5%:   .

Source: StockCharts.com; data as of July 26, 2018

Under XLC's Hood

Given XLC's "communication services" investment thesis, it shouldn't be surprising that the fund is mostly invested in internet services stocks (55%) and broadcasters (18%). Telecommunications companies, both integrated and wireless, also make up roughly 11% of the fund, representing the sector's continued heritage as a bucket for telecom stocks.

Investors should note that XLC is a narrow and top-heavy ETF. Seventy-seven percent of its 27-stock portfolio is held by its top 10 companies, with 47% allocated to just the top two—Facebook and Alphabet.

Though the fund itself is still small relative to other State Street sector ETFs, XLC's underlying stocks are profoundly liquid, and the fund itself trades well. XLC has healthy daily volume of $18 million and an average spread of 0.05%.

Over the past 30 days, XLC is up 1.2%.

Contact Lara Crigger at [email protected]