A Bullish View On A New Sector ETF

Due in large part to weakness in the FANG stocks, the Communication Services Select Sector SPDR XLC is off to rocky start.

XLC debuted in June, ahead of the September launch of the communication services sector. The sector is a refreshed version of the stodgy old telecommunications group.

What Happened

XLC follows the Communication Services Select Sector Index. Among this year's crop of new ETFs, the fund is one of the most successful as highlighted by $3.17 billion in assets under management. Some of that tally is attributable to professional investors rotating out of consumer discretionary and technology funds to gain exposure to stocks that move from those sectors to communication services.

Of the four FANG stocks, Amazon.com Inc. AMZN is the only one not residing in XLC while Facebook Inc. FB, Google parent Alphabet Inc. GOOG and Netflix, Inc. NFLX are three of XLC's top nine holdings.

Why It's Important

Even with the recent weakness displayed by the FANG quartet, AltaVista Research has an Overweight rating on XLC.

“Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals,” said the research firm.

Including XLC, AltaVista has Overweight ratings on five sector SPDR ETFs. The communication services ETF is down almost 9 percent in the fourth quarter and lower by 12.43 percent since coming to market. Facebook, the two shares classes of Alphabet and Netflix combine for over 44 percent of the new ETF's roster.

What's Next

While XLC has recently struggled, AltaVista remains bullish on the fund's prospects.

“This new sector includes fast-growing media and entertainment companies from the Discretionary and Tech sectors, plus Telecom, dominated by Facebook and Alphabet,” said the research firm. “However the outlook has diminished considerably in recent months, resulting in a reduction in the long-term EPS growth forecast from 12.5% to 10.6% and declining analyst sentiment. However, recent price declines have now made valuations look attractive in our opinion”

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