Market Overview

Defensive Names Could Help This Growth Sector ETF

Defensive Names Could Help This Growth Sector ETF

The Communication Services Select Sector SPDR (NYSE: XLC) and rival exchange traded funds tracking the communication services sector are often viewed as growth plays due to large weights to popular internet stocks.

Facebook Inc. (NASDAQ: FB), Alphabet Inc. (NASDAQ: GOOG) and Netflix, Inc. (NASDAQ: NFLX), for example, combine for 48% of XLC's weight.

What Happened

While XLC has a growth feel, it's also home to some defensive names, including Verizon Communications (NYSE: VZ) and AT&T (NYSE: T). Some analysts see traditional telecommunications stocks providing a lift to the communication services sector in the second half of this year.

“Traditional phone companies AT&T and Verizon dominate the index,” said Morningstar in a recent note. “Verizon shares have stagnated this year after a fantastic run in 2018, while AT&T has roughly kept pace with the market, bouncing back from a rough sell-off after the Time Warner merger. We believe AT&T shares have more room to run.”

AT&T and Verizon are both top 10 holdings in XLC and combine for nearly 9% of the fund's weight.

Why It's Important

“While traditional telecom has been lackluster, the rest of the sector has been on fire,” said Morningstar. “Cable companies have continued to steal share in the Internet access market thanks to their superior network capabilities, offsetting fears of cord-cutting in the television business.”

XLC allocates over 43% of its to media and entertainment companies, leveraging it to strength in cable providers as well as network operators, such as Walt Disney Co. (NYSE: DIS).

XLC is up 22.12% year to date and investors have added $2.3 billion to the fund this year. That is a healthy percentage of XLC's $5.8 billion in assets under management.

What's Next

Among individual XLC components, AT&T looks like a potential winner among the fund's more defensive names.

“We’ve long disliked AT&T’s capital-allocation decisions, but fears around its integration strategy and debt load have pushed the shares down to attractive levels, in our view,” notes Morningstar. “Also, given the size of the strategic moves AT&T has made recently and its emphasis on reducing leverage, we don’t expect another costly decision anytime soon. We believe that AT&T's wireless and media businesses remain well positioned competitively and will produce stable cash flow for years to come, enabling the firm to quickly repay debt.”

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