Market Overview

A Recent Upgrade For This Growth Sector

A Recent Upgrade For This Growth Sector

The Communication Services Select Sector SPDR (NYSE: XLC), the largest exchange traded fund dedicated to the fourth-largest sector in the S&P 500, is up nearly 12 percent this year and some analysts are bullish on the communication services sector.

Communication services officially debuted last year as the S&P 500's newest sector, bringing a refreshed, faster-growing view of the old telecommunications sector.

What Happened

In a note out last week, CFRA Research boosted its recommended weighting on the communication services sector to Overweight from Underweight.

XLC holds 26 stocks, but about 42.5 percent of the fund's weight is allocated to Facebook Inc. (NASDAQ: FB) and the two share classes of Google parent Alphabet Inc. (NASDAQ: GOOG). CFRA has four-star ratings on those two stocks.

“FB has advanced 21% year-to-date, but the stock trades at a forward P/E of 22, a 30% discount to its five-year average,” said CFRA Director of ETF & Mutual Fund Research Todd Rosenbluth in the note.

Why It's Important

Shares of Facebook, XLC's largest holding, reside at the highest levels since last August and look poised to close a technical gap that sent the social media giant tumbling last year.

“Meanwhile, both Alphabet and Facebook have growth drivers that could result in better performance in 2019 compared to 2018, including opportunities to increase online ad revenue,” said Rosenbluth.

The $4.62 billion XLC also allocates a combined 8.41 percent of its weight to traditional telecom giants AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ).

“These telecommunications companies are operating in a competitive environment, though they are expected to benefit from investments in 5G as it is rolled out later in the year,” said Rosenbluth.

What's Next

CFRA has an Overweight rating on XLC and a Marketweight rating on the rival Vanguard Communication Services ETF (NYSE: VOX).

VOX has an annual expense ratio of 0.10 percent, or $10 on a $10,000 investment compared to 0.13 percent on XLC. However, XLC is more heavily traded, leading to tighter bid/ask spreads than what are found on VOX.

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