Market Overview

The Communication Services Sector Is Almost Here

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The Communication Services Sector Is Almost Here

The arrival of the communication services sector becomes official later this month. It's a move that will see an array of well-known stocks in the consumer discretionary and technology sectors move to communication services.

The move was previously announced by index providers MSCI and Standard & Poor's. Communication services is not a new sector. Rather, it is a refreshed view on the old telecommunications sector. After the debut of communication services, the S&P 500 will continue to have 11 sectors. 

What Happened

Companies such as Alphabet Inc. (NASDAQ: GOOGL) (NASDAQ: GOOG), Facebook Inc. (NASDAQ: FB) and Netflix, Inc. (NASDAQ: NFLX) will join Verizon Communications Inc. (NYSE: VZ) in the communication services group.

“While the fourth stock in that list may seem out of place, ETFs investors have started to get comfortable with these companies inside the same sector fund, as asset managers prepare for a significant GICS revamping at the end of the month,” CFRA Research's Todd Rosenbluth said in a Tuesday note. 

Why It's Important

Some exchange traded funds already reflect the communication services sector. The Communication Services Select Sector SPDR (NYSE: XLC) is almost three months old and has $513.3 million in assets under management. XLC was created in anticipation of communication services' debut.

The new ETF allocates nearly 43 percent of its combined weight to Facebook and the two classes of Alphabet stock. Netflix is also a top-10 holding in XLC.

“Overall, CFRA has neutral views on the stocks inside from a valuation and risk perspective, leveraging our STARS and fair value assessments and incorporating S&P Global's Credit Ratings and Quality Rankings metrics,” Rosenbluth said. 

What's Next

Rather than create a new ETF for the communication services sector, Vanguard opted to reconfigure an existing product. Those changes are reflected in the Vanguard Communication Services ETF (NYSE: VOX). VOX allocates almost 43 percent of its combined weight to Alphabet, Facebook and Verizon.

CFRA has Marketweight ratings on VOX and XLC.

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