Market Overview

FANG Weakness Drags New Communication Services ETFs

FANG Weakness Drags New Communication Services ETFs

The communication services sector replaced the telecommunications sector in September, and several high-flying stocks migrated from the consumer discretionary and technology sectors to communication services in the process. 

Stocks making the move include three of the four in the FANG group: Facebook Inc. (NASDAQ: FB), Google parent Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL) and Netflix, Inc. (NASDAQ: NFLX).

What Happened

Increased equity market volatility to start October is plaguing growth and momentum stocks, including some of the FANG names, and weighing on communication services exchange traded funds in the process. The Communication Services Select Sector SPDR (NYSE: XLC) is saddled with a fourth-quarter loss of 10 percent.

XLC debuted in June in anticipation of the communication services sector's debut. The fund has rapidly become a favorite for tracking the sector, amassing $2.74 billion in assets under management as of Oct. 11.

Why It's Important

Public relations are hampering some of XLC's marquee components.

Last week, “Google announced that private data from 500,000 users of its Google+ social network, whose consumer version is being shut down, may have been exposed to external developers,” Reuters reported. “On Sept. 28, Facebook said that hackers had stolen digital login codes allowing them to take over user accounts. Some 29 million accounts were affected, the company said in a update on Friday.”

Last month, Facebook and Twitter Inc. (NYSE: TWTR) executives testified before Congress on data security. Google refused to participate in those hearings, but amid public backlash, the company said CEO Sundar Pichai will testify before Congress this year.

Facebook and the two classes of Alphabet shares combine for about 40 percent of XLC's weight. Shares of Twitter are 2.66 percent of XLC's roster.

What's Next

The trade spat between China and the U.S. is another factor to consider when mulling an ETF like XLC, as some of its holdings are highly sensitive to trade news.

“Also, two communication stocks, Netflix and Alphabet, are among the most trade-sensitive within the 100 largest U.S. stocks by market cap, according to an Oct. 4 note from Morgan Stanley,” Reuters said. 

Netflix accounts for 4.22 percent of XLC's weight.

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